Section 179 and bonus depreciation are two valuable tax deductions that can give you a major tax savings. By claiming either or both of these deductions on your tax return, you can recover a substantial amount of your acquisition cost. But while Section 179 and bonus depreciation are similar in that respect, there are differences in the calculation, limitations, and flexibility. Let’s take a look at the chart below to find out what sets these two apart.
Bonus Depreciation vs Section 179 At a Glance
Section 179 | Bonus Depreciation | |
|---|---|---|
Who the Deduction Is Best for | Most small businesses should claim Section 179 up the maximum dollar limitation since Bonus Depreciation is only 80% of the purchase price of the asset. | Businesses should claim bonus depreciation on eligible purchases that exceed the annual dollar limitation for Section 179. |
How the Deduction Is Claimed | An election must be made to expense property under Section 179 on Part I of IRS Form 4562. | This is an automatic deduction; no election needs to be made. |
Flexibility | This deduction can be claimed in whole or in part on a per-asset basis, and you can also specify the amount of Section 179 deduction that you want to claim on a particular asset. | Bonus depreciation automatically applies to all eligible purchases. You can make an election to opt out for an entire asset class or all eligible classes of property. You cannot elect out of bonus depreciation for particular assets without electing out for the entire class. |
Annual Dollar Limits | The Section 179 deduction is limited to $1,160,000 for 2023. The maximum deduction is reduced dollar for dollar by the amount of property purchased that exceeds $2,890,000 for 2023. Both the limit and phase-out threshold are adjusted annually for inflation. | Bonus depreciation is not subject to an annual dollar limitation, but rather allows you to deduct a maximum percentage of qualifying property. You can deduct 80% of the cost of property in 2023 (60% for 2024). The acquisition cost not claimed as bonus depreciation can be depreciated under the normal MACRS rules. |
Taxable Income Limit | The amount of the deduction that is available to you is limited to your taxable income. If you do not have any taxable income, Section 179 can be carried forward. | Not limited by your taxable income, bonus depreciation can be used to create a net loss. You can also use it to create a net operating loss (NOL) and carry it forward or back (if applicable) to offset other income. |
Recapture of Tax Deduction | Subject to recapture if the business use of the property falls below 50%. | Not subject to recapture if business use falls below 50%. You may be subject to recapture if you sell or otherwise dispose of the property. |
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Section 179
Section 179 offers a great deal of flexibility, which is why it’s a favorite amongst many business owners during filing season. You can claim this deduction on a per asset basis or on an entire class of property—or you could choose not to claim it at all.
While you can make many adjustments when it comes to application of this deduction, it does come with some restrictions. The total amount you can deduct is subject to annual limitation and the taxable income limitation. If your business is in the red, then this may not be the best deduction for you.
Bonus Depreciation
Much like Section 179, bonus depreciation speeds up the depreciation deduction. At current rates (80% for 2023 and 60% for 2024), you can claim a deduction for nearly the full price of a qualified business asset. This makes bonus depreciation a powerful tax savings tool.
Another unique feature about this deduction is that it is not limited to just your taxable income. That means, in any year that you claim bonus depreciation and it generates a net loss, you can carry the loss back to offset your previous year’s income.
You may have to do a little extra work and file an amended tax return to carry the net loss back—but that is a small trade off for a big chance of having more money in the bank.
Qualifying Property for Section 179 & Bonus Depreciation
Qualifying property for Section 179 is tangible personal property (versus real property) used in a trade or business for more than 50% of the time. Qualifying property for bonus depreciation is property with a MACRS recovery period of 20 years or less used in a business for more than 50% of the time.
While these definitions are structured differently, most 20-year-or-less MACRS property is also tangible personal property. Therefore, with a few exceptions, Section 179 and bonus depreciation apply to the same property.
Qualifying Property | Section 179 | Bonus Depreciation |
|---|---|---|
Computers & Mobile Devices | ✓ | ✓ |
Machinery & Equipment | ✓ | ✓ |
Office Furniture & Equipment | ✓ | ✓ |
Plumbing Components of a Building | ✕ | ✕ |
Special Plumbing Items for Specific Machinery or Equipment | ✓ | ✓ |
General Heating, Ventilating, and Air Conditioning (HVAC) Systems | ✕ | ✕ |
HVAC Systems to Meet Special Business Needs | ✓ | ✓ |
Off-the-Shelf Software | ✓ | ✓ |
Vehicles | Limited to $19,200 | Limited to $8,000 |
Qualified Improvement Property (QIP) | ✓ | ✓ |
Nonresidential Roof Improvements or Replacements | ✓ | ✕ |
Nonresidential HVAC Improvements or Replacement | ✓ | ✕ |
Nonresidential Alarm System Improvement or Replacement | ✓ | ✕ |
QIP, which qualifies for both bonus depreciation and Section 179, is any improvement to the interior of nonresidential section 1250 property, such as a warehouse, barn, rental property, or commercial buildings. The improvement must be made after 2017 and after the building was initially placed in service by the taxpayer.
It excludes the following:
- Any enlargement of the building
- Elevators or escalators
- The internal structure or framework of the building
Claiming Section 179 & Bonus Depreciation in the Same Year
You can claim both Section 179 and Bonus Depreciation in the same year, but not on the same acquisition costs. Below is an example of how claiming both deductions will maximize your tax benefit for years after 2022 when the bonus depreciation rate is less than 100%.
Example Claiming Only Bonus Depreciation
Michael Scott purchased $2.9 million dollars of 5-year MACRS property for his paper company in 2023. For his purchase, he is allowed to claim both the Section 179 deduction and bonus depreciation, but he chose not to make the Section 179 election on form 4562 and only claim bonus depreciation.
After crunching the numbers, Michael learned that his total bonus depreciation allowance for the year is $2,320,000. The remaining $580,000 of the cost will be depreciated for 5 years under the normal MACRS rules.
Here’s how Michael figured his bonus depreciation allowance.
$2,900,000 (total cost of assets) x 80% (2023 bonus depreciation rate) = $2,320,000 (Michael’s bonus depreciation allowance)
Example Claiming Both Section 179 & Bonus Depreciation
Let’s consider the same facts as above, except this time Michael makes the Section 179 election and also claims bonus depreciation.
- He takes the Section 179 allowance into account.
- He figures the reduction of the Section 179 allowance: $2,900,000 – $2,700,000 = $200,000.
- He then figures his maximum Section 179 allowance for 2023: $1,080,000 – $200,000 = $880,000.
Michael’s total section 179 deduction for 2023 is $880,000.
- He allocates the remaining $2,020,000 ($2,900,000 – $880,000) of the acquisition cost to the bonus depreciation rate for 2023
- $2,020,000 x 80% = $1,616,000
- He adds his Section 179 allowance to his bonus depreciation allowance and arrives at $2,496,000. This is the total amount Michael can deduct using these two tax provisions in 2023. The remaining $404,000 will be depreciated under the Normal MACRS rules.
Upon review of both methods, using both Section 179 and bonus depreciation gives Michael the most benefit. Like Michael, the highest total deduction generally comes by maximizing your Section 179 and then claiming Bonus Depreciation on the remaining cost.
Frequently Asked Questions (FAQs)
Should you claim bonus depreciation, section 179 or both?
Each business owner has a unique tax situation; thus, when choosing between Section 179, bonus depreciation, or claiming both, you should select the deduction(s) that gives you the most tax benefit.
Can Section 179 and bonus depreciation be claimed in the same year?
Yes, you can claim both Section 179 and bonus depreciation in a single tax year. When claiming both, the Section 179 allowance will be taken into account first, and then bonus depreciation will be applied.
Are there any circumstances when Section 179 should be taken alone?
If both deductions apply, there may be some circumstances where opting out of bonus depreciation is beneficial—but this can only be decided case-by-case. For instance, if you are thinking of applying for a small business loan or other financing and do not want to lower the taxable income of the business, it may be beneficial to opt out of bonus depreciation to keep your income high for the year. However, this would also increase your taxable income.
Bottom Line
Section 179 and bonus depreciation are both powerful tax saving tools. Knowing when and how to use either deduction could help your business maximize its tax savings. If your business owns tangible property, you do not want to miss out on using these two tax provisions. Section 179 is just one of the many deductions that play a role in your ending tax calculation. For more information on how to finalize your numbers, check out our article on how to calculate small business taxes.
