In recent years, the US tax code has undergone significant changes, particularly in the realm of asset depreciation and capital investments.

Two key provisions that have garnered attention are Bonus Depreciation and Section 179 of the Internal Revenue Code. In this article we'll go through the differences between Bonus Depreciation and Section 179, and how they impact businesses' tax strategies and financial decisions.

Bonus Depreciation

Bonus Depreciation is a tax incentive that allows businesses to deduct a certain percentage of the cost of qualifying assets immediately upon acquisition. It was initially introduced as part of the Economic Stimulus Act of 2008 and has undergone several modifications since then. Under current tax laws, businesses can claim 100% Bonus Depreciation on eligible assets placed in service between September 27, 2017, and January 1, 2023.

The primary advantage of Bonus Depreciation is its ability to provide businesses with an immediate tax deduction for qualified asset purchases, thereby reducing taxable income and lowering tax liabilities in the year of acquisition.

This accelerated depreciation can be particularly beneficial for businesses looking to invest in capital assets and improve cash flow by deferring tax payments to future years.

That being said, it's essential to note that Bonus Depreciation is subject to certain limitations and restrictions. For example, only new property (not used property) qualifies for Bonus Depreciation. There are also certain types of assets, such as real estate and certain listed property, that may be excluded from eligibility. Additionally, the availability of Bonus Depreciation may vary depending on the specific tax year and legislative changes.

Section 179

Section 179 of the Internal Revenue Code provides businesses with the opportunity to deduct the full purchase price of qualifying assets in the year they are placed in service, rather than depreciating them over time. The key advantage of Section 179 is its flexibility and broader applicability to a wide range of business assets.

Unlike Bonus Depreciation, which applies to a wide range of assets, Section 179 is specifically tailored to certain types of tangible personal property, such as equipment, vehicles, and machinery.

It allows businesses to deduct up to a specified dollar amount ($1,080,000 for tax year beginning in 2022, subject to inflation adjustments) of qualified asset purchases, with a phase-out threshold for total asset purchases exceeding a certain threshold ($2,700,000 for tax year 2022).

By leveraging Section 179, businesses can accelerate depreciation deductions and realize significant tax savings in the year of acquisition. Which can be especially advantageous for small and medium-sized businesses with limited cash flow, as it allows them to offset taxable income and reduce tax liabilities without depleting their working capital.

However, similar to Bonus Depreciation, Section 179 has its limitations and restrictions. For example, certain types of property may not qualify for Section 179 treatment, and the deduction is generally limited to taxable income from active business activities.

Additionally, businesses must elect to claim Section 179 deductions on their tax returns and adhere to specific record-keeping requirements.

Key Differences

While both Bonus Depreciation and Section 179 offer tax incentives for businesses to invest in capital assets, there are several key differences between the two provisions:

Understanding the differences between Bonus Depreciation and Section 179 is essential for businesses seeking to optimize their tax strategies and maximize tax savings. While both provisions offer valuable incentives for capital investments, they vary in terms of eligibility, deduction amounts, timing, and other factors. By carefully evaluating their business needs and consulting with tax professionals, businesses can leverage Bonus Depreciation and Section 179 to their advantage and make informed financial decisions that support their growth and profitability objectives.