Understanding Bonus Depreciation and Section 179 Deductions

There are several tax-saving strategies for real estate professionals. When it comes to a property’s physical assets, depreciation and Section 179 deductions are two primary methods for reducing tax liability. Although both depreciation and Section 179 allow deductions in the first year of an asset’s life, there are some key differences between the two tax-saving strategies that should be considered during tax planning discussions.

Bonus depreciation, also known as additional first-year depreciation, allows businesses to deduct a percentage of eligible asset costs in the first year the asset is placed in service under the general depreciation system (GDS). Any remaining basis must be depreciated using its respective method and convention. The Tax Cuts and Jobs Act in 2017 revised bonus depreciation rules and enabled businesses to deduct 100% of an eligible asset’s cost if it was placed in service after September 27, 2017, and before January 1, 2023. Beginning January 1, 2023, bonus depreciation rates have decreased by 20% each year, currently at 60% for 2024, and will continue to decline unless legislation is further amended. This phase-out of bonus depreciation has caused businesses to pursue additional tax-saving strategies, such as Section 179.

Before examining their respective tax treatments, it is crucial to consider the types of assets that are eligible for bonus depreciation and Section 179. Any asset depreciated under the modified accelerated cost recovery system (MACRS) with a recovery period of 20 years or less is eligible for bonus depreciation. Most commonly, these are assets considered to be tangible personal property and land improvements. Recent legislation also includes Qualified Improvement Property (QIP), which is interior, non-structural improvements made to a non-residential, existing building structure.

Section 179 includes all of the aforementioned assets as well as a few more. Off-the-shelf computer software used to operate a business is considered a qualifying property for the Section 179 deduction. Additional post-acquisition improvements not covered by QIP can also qualify, such as roof replacements, exterior HVAC equipment, fire protection systems, and security systems. The additional asset types included in the Section 179 deduction allow businesses to write off critical structural improvements that may be recurring, such as roof repairs and HVAC equipment costs, that would not be eligible for bonus depreciation if capitalized.

Unlike bonus depreciation, the Section 179 deduction offers a different approach. It’s not tied to a percentage of the eligible asset’s cost. Instead, a total dollar limitation for eligible assets is set for a given tax year, and businesses can expense up to said dollar amount. For property placed in service on or after January 1, 2023, the maximum amount a business can deduct is $1,160,000. This deduction can be used for a single eligible asset or spread across multiple assets, as long as it does not exceed the maximum amount. This flexibility empowers businesses to make strategic decisions about their tax planning.

With bonus depreciation currently sitting at 60%, businesses are forced to depreciate the remaining value of any capitalized asset. If the cost of an eligible asset or assets is less than the yearly limit, using the Section 179 deduction would be more advantageous than depreciating the property. If there is any remaining cost after applying the Section 179 deduction, it can be depreciated over time.

Both bonus depreciation and the Section 179 deduction are powerful tools for businesses to save on taxes by allowing them to write off part or all of the cost of eligible assets in the first year of service. Bonus depreciation is based on a percentage of the asset’s cost, while Section 179 sets an annual dollar amount threshold for businesses. Some improvements qualify for Section 179 but not for bonus depreciation. When planning tax-saving strategies, it’s crucial to take a comprehensive approach to each individual asset to maximize benefits for the business.

If you have any questions or need further clarification on Section 179 or bonus depreciation, please don’t hesitate to reach out to the McGuire Sponsel Fixed Asset Services team . We’re here to provide expert advice and support to help you navigate the complexities of tax-saving strategies in the real estate industry.