Bonus Depreciation & Section 179

Accelerated depreciation methods, such as bonus depreciation and the Section 179 deduction, provide business owners the opportunity to write off the cost of certain assets placed in service during the year quicker than traditional depreciation schedules allow. These methods offer significant tax benefits while enhancing cash flow for businesses. However, these options have their own nuances that should be considered.

Bonus Depreciation

Bonus depreciation for 2024 is limited to 60% of the cost of eligible property placed in service in 2024. For 2025, the limitation is 40% and is currently scheduled to be reduced by 20% each year until it is fully phased out in 2027.

To qualify for bonus depreciation, the property placed into service must have a useful life of 20 years or less. Some examples of qualifying property include qualified leasehold improvements, computer software, vehicles, and equipment.

Advantages

  • No dollar cap on the amount of bonus depreciation that can be taken in a year.
  • Bonus depreciation can reduce taxable income below zero. This means it can create losses to offset other income and even create a net operating loss.

Disadvantages

  • The decision to take bonus depreciation is made for each group of assets with the same class life.
    • Example: a taxpayer purchases two 5-year assets and does not want to use bonus depreciation on one. But, they must elect out of using bonus depreciation on both since each are 5-year properties.

Section 179 Deduction

The Section 179 deduction for 2024 is limited to $1,220,000. The 2025 limitation is $1,250,000. The limitation is calculated at the taxpayer level.

Some examples of business assets eligible for Section 179 are machinery, equipment, furniture, vehicles, and certain non-residential building improvements.

Advantages

  • Section 179 has greater flexibility than bonus depreciation. The taxpayer can decide how much Section 179 deduction to take on a per asset basis.

Disadvantages

  • In addition to the annual dollar cap as previously mentioned, Section 179 begins to phase out once the cost of assets placed in service in a year reaches a certain threshold. For 2024, the maximum deductible amount begins to decrease dollar for dollar once total purchases exceed $3,050,000. For 2025, the threshold is $3,130,000.
  • Section 179 is subject to a business income limitation. Meaning it can’t reduce taxable income below $0.
  • Passive investors with a Section 179 deduction flowing through to them on a Schedule K-1 may not be able to use the deduction unless they have taxable income from other businesses in which they are actively involved.

Ask your KT Tax Advisor what depreciation options are available to use on your 2024 tax return and what planning opportunities are available for 2025 and beyond.