What are the differences between Section 179 and Bonus Depreciation?
Prior readings: Section 179 Benefits, Bonus Depreciation
Section 179 is an IRS tax code that allows you to recover all or part of the cost of qualifying equipment, by deducting it in the year you put it into service, and Bonus Depreciation is another incentive that allows businesses to immediately deduct a percentage of the purchase price of eligible assets, rather than write them off, over the useful life of the asset. Given how similar these two tax incentives are, here are some differences so you can understand how they are separated in your books.
Section 179 assets apply on an asset-by-asset basis, whereas Bonus Depreciation applies by asset class. Section 179 can apply to a partial asset cost and will apply only to the extent of the company’s taxable income, with any remaining balance carried over. Bonus Depreciation applies to the full asset class and has no income or loss limitation to the deductibility of the bonus depreciation. In general, you take your Section 179 deduction first, followed by Bonus Depreciation.
The conclusion? How you choose to deduct is up to you and can be done in ways to benefit your business in the long run. Look at your types of leases and see what methods would best apply and how you want to treat your assets. Bonus Depreciation could go away and is currently planned to reduce in 2023 and sunset by 2026, so make a long-range plan so that your depreciation methods work for you when bonus depreciation is no longer around.