The IRS encourages business investment in fixed assets by offering significant tax deductions under Section 179 and 168(k) Bonus Depreciation. While both provide opportunities to reduce taxable income, they have distinct rules, limits, and strategic advantages. Understanding these differences is essential to optimizing your tax strategy for assets purchased in any given year.
Key Differences Between Section 179 and Bonus Depreciation
Eligible Assets
- Section 179:
Designed for personal property assets like equipment, machinery, and furniture. It also applies to specific non-residential real property improvements, including:- Roofs
- HVAC systems
- Security and fire alarm systems
Assets must be used primarily (over 50%) for business purposes.
- Bonus Depreciation (168(k)):
Includes most assets with a useful life of 20 years or less, such as:- Farm buildings and land improvements (e.g., fences, roads, patios)
- Machinery, appliances, and other qualifying equipment
Bonus depreciation must be applied uniformly to all assets within the same asset class life (e.g., all 5-year assets).
Annual Deduction Limits
- Section 179 (2024):
- Deduction limit: $1,220,000
- Investment cap: $3,050,000 (phases out dollar-for-dollar above this threshold)
- Requires sufficient business income (e.g., owner’s W-2 wages may count).
- Bonus Depreciation (2024):
- Deduction: 60% of asset cost (reduced from 100% in 2022)
- No business income requirement—can be applied even in years with a business loss.
Flexibility and Timing for Deductions
- Section 179:
- Allows you to choose the deduction amount for each asset, enabling precise control over taxable income.
- Remaining costs are depreciated normally over the asset’s useful life.
- Bonus Depreciation:
- Must be applied consistently to all assets in the same asset class. For example, if you take bonus depreciation on a $100,000 machine, it applies to all other 5-year assets acquired that year.
Special Considerations for Listed Property
Assets used partially for personal use (e.g., vehicles) require additional considerations:
- 2023 Vehicle Limits (under 6,000 lbs):
- Section 179: Maximum deduction $12,200
- Bonus depreciation: Maximum deduction $8,000
- Total combined deduction: $20,200
To qualify, the asset must be used over 50% of the time for business purposes.
Section 179 vs. Bonus Depreciation: Which Is Better?
- Income Levels:
- Use Section 179 if you have sufficient income to offset.
- Opt for bonus depreciation in years with lower or negative income.
- Asset Spending:
- Businesses purchasing large quantities of fixed assets may hit Section 179 limits and need to leverage bonus depreciation.
- Tax Brackets:
- Consider your current tax rate versus future rates. Accelerating deductions in high-tax years can provide greater savings.
Can You Use Both?
Yes! Combining Section 179 and bonus depreciation can maximize deductions:
- Apply Section 179 first to selected assets until reaching the deduction limit.
- Use bonus depreciation for additional eligible assets.
However, state conformity varies—many states do not follow federal bonus depreciation rules, requiring adjustments when filing state returns.
Sequoia Investments: Your Tax Strategy Partner
Optimizing your tax position with Section 179 and bonus depreciation requires a strategic approach. Sequoia Investments can help you:
- Identify eligible assets.
- Align tax strategies with your long-term financial goals.
Take action now to maximize your savings while these benefits are still available. Contact us today to ensure your business is prepared to leverage every tax advantage.
