The Difference Between Bonus Depreciation and Section 179 Deductions

Two common tax benefits regarding depreciation are bonus depreciation and Section 179 deductions. Section 179 allows taxpayers to recognize depreciation expense on qualifying property when its used more than 50% of the time for business. It allows business owners to deduct a set dollar amount of new business assets that have been put in place during the current tax year.

Broadly speaking, Section 179 rules are often more flexible with timing than bonus depreciation rules. Under Section 179, the taxpayer can elect to save certain assets for future tax breaks or claim only a portion of the cost and defer the other portion for a future tax year. With bonus depreciation, the amount of depreciation allowable is strictly defined.

However, bonus depreciation may apply to higher spending amounts. Bonus depreciation is not capped in regards to dollars; an entire multi-million deduction for the entire cost of a single may be recognized in a single year. On the other hand, Section 179 deductions were limited to $1,160,000 for 2023 (based on $2,890,000 capital equipment spend).1

Each program has specific criteria that make it more or less appealing to certain taxpayers. Some real estate improvements do not qualify for bonus depreciation but do quality for Section 179 treatment. On the other hand, bonus depreciation can exceed business income, while Section 179 deductions are limited to annual business income. It is also possible to claim both bonus depreciation and Section 179 deductions in the same tax year.

Both Deductions Can Work Together

Both bonus depreciation and Section 179 both allow for immediate expense deduction of capital assets purchases, however, using them together can offer the greatest possible benefits. The IRS ordering rules require most business to apply Section 179 first then bonus depreciation. 

What Are the Benefits of Bonus Depreciation?

Bonus depreciation allows a taxpayer to reduce their short-term taxable income by the cost of depreciable assets. Bonus depreciation allows a taxpayer to deduct 100% of depreciation upfront on their Federal tax return. This accelerated depreciation method means a company may pay substantially fewer taxes in the tax year in which they claim bonus depreciation.

Do Vehicles Qualify for Bonus Depreciation?

Yes, businesses can deduct and depreciate 100% of the cost of vehicle or truck under bonus depreciation rules. Note that this will be different than Section 179 rules; though a vehicle or truck is often a qualifying asset, it will be subject to a deduction up to a specific dollar amount.

Should I Take Bonus Depreciation?

Electing to take bonus depreciation is often favorable for taxpayers seeking to minimize short-term tax liabilities. Though future year liabilities may be higher due to having a lower amount of bonus depreciation to claim, this may also create a net business loss that may be rolled over and carried to future years. There may be situations that make more sense to elect out of the program; for more information, consult your advisor to see whether you qualify for bonus depreciation and whether it strategically makes sense to claim.

What Assets Qualify for Bonus Depreciation?

To be eligible for bonus depreciation, eligible property must be MACRS property with a useful life of 20 years or less, certain depreciable computer software, or qualifying leasehold improvement property. In addition, new criteria limits how the asset was acquired or how the basis is to be calculated.

For more information on bonus depreciation and Section 179 deductions, please contact our business tax team.