How does Section 179 expensing differ from bonus depreciation when purchasing new equipment?
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Section 179 expensing and bonus depreciation are both powerful tax incentives that allow businesses to recover the cost of qualifying property more quickly, but they differ in several key respects relating to eligibility, limitations, application, and strategic use.
1. Eligible Property
- Section 179: Applies primarily to tangible personal property (such as machinery, equipment, certain vehicles, and some real property improvements) acquired by purchase for use in the active conduct of a trade or business. It does not apply to land, buildings, or most land improvements. However, certain improvements to nonresidential real property—such as qualified improvement property (QIP), roofs, HVAC, fire protection, and security systems—are eligible for Section 179 expensing.
- Bonus Depreciation: Covers a broader range of property, including both new and used tangible property with a recovery period of 20 years or less under MACRS. This includes machinery, equipment, certain land improvements, and QIP. Bonus depreciation is not limited to property acquired new by the taxpayer; used property can also qualify if it meets certain requirements.
2. Deduction Limits
- Section 179: For 2025, the maximum deduction is $1,250,000, with a phase-out beginning when total qualifying property placed in service exceeds $3,130,000. The deduction is reduced dollar-for-dollar by the amount above this threshold, so businesses with very large capital expenditures may see their Section 179 benefit limited or eliminated.
- Bonus Depreciation: There is no dollar cap or phase-out threshold. For 2025, the bonus depreciation rate is 40% for property acquired and placed in service before January 20, 2025, and 100% for property acquired and placed in service after January 19, 2025, under the new law. This means businesses can deduct a large portion (or all) of the cost of qualifying property in the first year, regardless of the total amount spent.
3. Business Income Limitation
- Section 179: The deduction cannot exceed the taxpayer’s aggregate taxable income from the active conduct of all trades or businesses for the year. Any amount not deductible due to this limitation can be carried forward to future years.
- Bonus Depreciation: There is no business income limitation. The deduction can create or increase a net operating loss (NOL), which can be carried forward to offset future taxable income.
4. Application Order and Flexibility
- Section 179: Must be applied first, on an asset-by-asset basis. Taxpayers can choose which assets to expense under Section 179, providing flexibility to maximize current-year deductions and manage taxable income.
- Bonus Depreciation: Applied after Section 179. It must be applied to all assets within the same class placed in service during the year, unless the taxpayer elects out for a particular class. This is less flexible than Section 179, but can be strategically used to manage taxable income, especially in years with excess business loss limitations.
5. Recapture Rules
- Section 179: If the business use of an asset drops to 50% or less during its recovery period, a portion of the deduction must be recaptured as ordinary income.
- Bonus Depreciation: If the asset is sold or disposed of, any gain up to the amount of bonus depreciation claimed is recaptured as ordinary income. There is no specific business-use threshold for recapture, but the general recapture rules for depreciation apply.
6. Other Key Differences
- Section 179: Not available to estates, trusts, or certain noncorporate lessors unless specific requirements are met. The deduction is also subject to controlled group aggregation rules, meaning the limits apply to all entities in a controlled group as a single taxpayer.
- Bonus Depreciation: Available to all taxpayers, including estates and trusts. There is no aggregation requirement for controlled groups.
7. Strategic Use and Planning
- Section 179: Best for smaller businesses with moderate capital expenditures and sufficient taxable income to absorb the deduction. It allows for targeted expensing of specific assets and can be carried forward if not fully used.
- Bonus Depreciation: Best for larger capital investments, especially when purchases exceed Section 179 limits or when creating an NOL is desirable. It is also useful for used property acquisitions and for businesses with fluctuating income.
8. Combining Both
Taxpayers can combine Section 179 and bonus depreciation: first applying Section 179 to selected assets up to the limit, then applying bonus depreciation to the remaining basis of eligible assets, and finally depreciating any remaining basis under MACRS.
9. Summary Table of Key Differences:
In summary: Section 179 expensing offers targeted, flexible, but capped and income-limited deductions for new equipment, while bonus depreciation provides larger, less restricted, and more automatic deductions for a broader range of property, including used assets, with no income or dollar limits. The two can be combined for optimal tax planning.
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