When you buy an asset that provides value over the course of a year, you may need to capitalize the asset and claim depreciation expense over the useful life of the asset. However, sometimes it makes more sense to claim accelerated depreciation. This simply means that you claim more depreciation expense in the year of the purchase.
Yes, it’s perfectly legal, and the IRS provides two avenues to maximize this accelerated depreciation: Section 179 and Bonus Depreciation.
Section 179 and Bonus Depreciation are two popular deductions that let you claim up to 100 percent of your asset’s cost the first year you purchase and start using the asset. So, which one should you choose? That’s a complex question.
What Is Bonus Depreciation?
Bonus depreciation is an accelerated depreciation method currently allowing 100% depreciation expense in the year of the purchase.
After January 1, 2023, the IRS is phasing bonus depreciation to:
- 80 percent in 2023
- 60 percent in 2024
- 40 percent in 2025
- 20 percent in 2026
Why did the IRS start bonus depreciation? It was part of the Tax Cuts and Jobs Act of 2017 (TCJA), which was designed to stimulate business investments (and business in general).
You can take the bonus depreciation deduction as long as you meet the following criteria:
- The asset is “qualified business property” with a useful life of 20 years or less
What Is Section 179?
Section 179 has been an option for decades. Simply put, Section 179 allows you to claim up to 100% of the costs of an asset in its year of purchase instead of claiming depreciation over the useful like of the asset. There are limits, though.
- Section 179 only applies to certain assets. They must be:
– Tangible
– Purchased (not leased)
– Used at least 50 percent for business
– Not acquired from a relative (Sorry, Grandma’s old Cadillac doesn’t qualify.) - You can’t claim a loss. If you only made $50,000 in net income, you can’t claim $100,000 in Section 179 deductions.
- There are spending limits and deduction limits. In 2021, these are:
– Capital acquisition limit: $2,620,000
– Section 179 depreciation limit: $1,050,000
If you exceed the purchase threshold, the deduction threshold is also reduced dollar for dollar by the same amount.
Can You Claim Both Bonus Depreciation and Section 179?
Yes, you can claim both for qualifying assets. Should you claim both? That depends on a lot of factors.
Unfortunately, no one can say whether you should claim Bonus Depreciation, Section 179, or both without first reviewing your finances. There are many, many ways to claim the two deductions, and frankly, there’s a lot of math involved.
For example, we might recommend claiming both for one client who needs the tax savings this year. Things are looking up for her business, but she needs some extra cash now. Her assets are eligible for both deductions, so she claims both and gets 100 percent of the cost of her assets in total deductions.
But then we might have another client with a much more complicated situation. He exceeds the Section 179 threshold for purchases and is planning to sell his business soon. He could still claim a lot of accelerated depreciation, but that would bring the book value of his assets down. This wouldn’t look great to potential buyers. So there’s a little more to consider in his situation.
Learn more about the differences between Section 179 and Bonus Depreciation with our infographic below:
Talk to the Nerds to see what option is best for you!
If you want to figure out which deduction is best for your business, you’ll need to look at the whole picture, examine your financial projections and business goals for the next few years and crunch the numbers. Or, you can always give your CPA Nerd a call for help. The number is 586.468.0200.
Fill out the contact form to have a Nerd contact you directly. While you wait, download the handy infographic for your reference. We look forward to hearing from you.