How does bonus depreciation interact with Section 179 expensing for assets placed in service in 2025?
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For assets placed in service in 2025, the interaction between Section 179 expensing and bonus depreciation is governed by a specific ordering and eligibility framework, which has been updated and clarified by the One Big Beautiful Bill Act (OBBBA) and the Internal Revenue Code. Here’s a comprehensive explanation of how these two provisions interact, including the relevant legal details, ordering rules, and practical implications:
1. Ordering of Deductions: Section 179 First, Then Bonus Depreciation
- Section 179 expensing is applied first. Taxpayers may elect to expense the cost of qualifying property under Section 179 up to the annual dollar limit and subject to the business income limitation. For 2025, the maximum Section 179 deduction is $2,500,000, with a phase-out threshold at $4,000,000 of qualifying property placed in service during the year. These amounts are indexed for inflation for tax years beginning after 2025.
- After Section 179, bonus depreciation is applied to the remaining basis. Once the Section 179 deduction is claimed, any remaining cost basis of the asset is eligible for bonus depreciation under Section 168(k), provided the property qualifies.
- After both Section 179 and bonus depreciation, any remaining basis is depreciated under MACRS. If the entire cost is expensed under Section 179 and/or bonus depreciation, no further MACRS depreciation is available for that asset.
2. Eligibility and Limits
Section 179 Expensing
- Eligible property: Generally includes tangible personal property (such as machinery, equipment, and certain software) and certain improvements to nonresidential real property (e.g., roofs, HVAC, fire protection, and security systems).
- Dollar limits: For 2025, the maximum deduction is $2,500,000, reduced dollar-for-dollar by the amount by which the cost of Section 179 property placed in service exceeds $4,000,000.
- Business income limitation: The Section 179 deduction cannot exceed the taxpayer’s aggregate taxable income from the active conduct of any trade or business for the year. Any disallowed amount is carried forward.
Bonus Depreciation (Section 168(k))
- Eligible property: Most tangible property with a recovery period of 20 years or less, certain computer software, water utility property, and qualified improvement property. The OBBBA permanently restores 100% bonus depreciation for property acquired and placed in service after January 19, 2025.
- No annual dollar cap or business income limitation: Unlike Section 179, there is no dollar limit or income limitation for bonus depreciation.
- Order of application: Bonus depreciation is applied after Section 179, but before regular MACRS depreciation.
3. Practical Example (2025)
Suppose a taxpayer acquires and places in service a $3,000,000 piece of eligible equipment in 2025:
- Section 179 Deduction: The taxpayer may elect to expense up to $2,500,000 (assuming sufficient business income and not exceeding the phase-out threshold).
- Bonus Depreciation: The remaining $500,000 ($3,000,000 - $2,500,000) is eligible for 100% bonus depreciation, so the entire remaining basis can be deducted in 2025.
- MACRS Depreciation: If both Section 179 and bonus depreciation fully expense the asset, there is no remaining basis for regular MACRS depreciation.
4. Special Considerations and Elections
- Electing out: Taxpayers may elect out of bonus depreciation for any class of property for a given year if they wish to defer deductions.
- Section 179 is often used for property types not eligible for bonus depreciation, such as certain improvements to nonresidential real property.
- State conformity: Some states do not conform to federal bonus depreciation or Section 179 rules, so state tax treatment may differ.
Summary Table of Interaction (2025)
In summary: For assets placed in service in 2025, Section 179 expensing is applied first (subject to its limits), and then 100% bonus depreciation is applied to any remaining basis of qualified property. Any remaining basis after both is depreciated under MACRS. This ordering allows many taxpayers to fully expense eligible property in the year placed in service, but the choice of which provision to use first can have implications for state taxes, income limitations, and future-year deductions.
If you have a specific scenario or asset type in mind, please provide more details for a tailored analysis.
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