Section 179 depreciation and bonus depreciation: Tax incentives that can benefit your business
Tax rules and regulations are constantly revised and updated as policymakers adapt to the current geopolitical and economic climate. While it can be difficult to keep track of the latest legislation, these changes can also help taxpayers adapt to current changes and give them financial support.
In particular, the current laws for accelerated depreciation can be greatly beneficial to businesses.
Section 179 and bonus depreciation are two examples of accelerated depreciation developed by the IRS to incentivize businesses in investing in new equipment.
Traditional depreciation requires you to calculate the cost of an asset over its total lifespan, but section 179 and bonus depreciation gives you more advanced options by allowing you to write off more of the costs in the same year the assets are placed in service. These accelerated depreciation methods essentially enable businesses to invest in new equipment and receive immediate tax benefits.
Section 179 includes an annual deduction limit and spending cap, allowing you to choose any amount within the thresholds and allocate deductions to the chosen assets. Bonus depreciation requires you to deduct the full bonus percentage for all assets in the chosen asset class.
It’s important to understand the legislation for these incentives and be aware that they’re subject to change. This way you can ensure that your business remains compliant and up to date with tax rules and regulations.
What you need to know about Section 179 depreciation
Section 179 has been in existence for more than 60 years and it has undergone several changes since it was first enacted in 1958.
While large businesses can benefit from these IRS tax code incentives, the section 179 depreciation is primarily geared toward small businesses, with tighter spending thresholds set in place.
The deduction limit for 2022 is $1,080,000. This applies to new and used equipment as well as “off-the-shelf” software that was purchased and put into service between January 1, 2022, and before the end of day on December 31, 2022.
Section 179 also has a spending cap. $2,700,000 is the maximum amount that can be spent on equipment in the 2022 tax year, further emphasizing that this is primarily a small business incentive.
Every business that financed, purchased and/or leased new or used business equipment in 2022 can qualify for Section 179 depreciation.
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What you need to know about bonus depreciation
Like Section 179, bonus depreciation allows you to write off significant amounts from the purchase price of your assets. It’s also known as the first-year depreciation because deductions are applied during the tax year that your asset was purchased and placed in service.
Bonus depreciation has undergone several legislative changes since its inception. The rules and limits have been modified by policymakers to suit the changing geopolitical and economic climates in the United States.
Here are some of the most notable changes that have occurred since bonus depreciation was introduced:
- The 2002 Job Creation and Worker Assistance Act served as a stimulus for the economy, enabling businesses to deduct 30% from eligible assets and recover from the costs of capital acquisition more quickly.
- The 2003 Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) increased the bonus depreciation to 50% for assets placed in service after May 3, 2003, but before January 1, 2005.
- The 2015 Protecting Americans from Tax Hikes (PATH) Act extended the tax incentive until 2019 and introduced the phase-out of the bonus depreciation rate after 2017, with the deductions expected to drop to 40% in 2018 and 30% in 2019.
- The 2017 Tax Cuts and Jobs Act (TCJA) increased the bonus depreciation rate to 100% and included other amendments that are effective until 2026.
Under current law, businesses can apply the 100% bonus depreciation to property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023. The TCJA also expanded the types of assets eligible for the bonus depreciation as long as they meet the qualifications, including used property as well as qualified film, television and live theatrical productions.
On the other hand, there are certain types of property that are now ineligible for bonus depreciation such as property primarily used in the business of the sale of:
- Electrical energy, water or sewage disposal services
- Gas or steam through a local distribution system
- Transportation of gas or steam by pipeline
The 100% bonus depreciation tax break is also scheduled to be phased out in a five-year period:
- 80% for property placed in service in 2023
- 60% for property placed in service in 2024
- 40% for property placed in service in 2025
- 20% for property placed in service in 2026
Unless the US Congress makes additional provisions, 2022 is the last year businesses can file for the 100% deduction before the tax incentive is phased out completely.
It’s important to remember that the property must be actively used in daily business operations during the tax year 2022 to be eligible for the full bonus depreciation. If a property is acquired within the current tax year but needs to undergo modifications or upgrades and be placed in service in 2023, the deductions will be at 80% instead.
How Section 179 and bonus depreciation overlap and interact with each other
If you’re planning to use both incentives within the same tax year, you need to file for Section 179 before applying for bonus depreciation.
Section 179 can give you more flexibility with your deductions, allowing you to choose which assets are covered under this incentive and which ones can be set aside and categorized for future tax breaks.
Unlike Section 179, bonus depreciation does not have an annual spending limit so the incentive can actually be bigger than your business income, allowing you to carry over unused deductions as future tax breaks.
To know how to get the biggest claims on your equipment, consult with your accountant to get a clear idea of what combination is most beneficial for your business.
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This third-party fintech software platform can also connect to your accounting system, minimizing the need for spreadsheets and eliminating double handling of data entry.
Understanding accelerated depreciation methods allows you to create a tax reduction strategy that improves the current financial health of your business while ensuring compliance.
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It’s amazing we calculated this year’s depreciation in just a matter of minutes!
Veenith Singh - Group Finance Operations Manager, Beca Group