Bonus Depreciation Being Phased Out…Consider Phasing In the 179 Expense Deduction
The Tax Cuts and Jobs Act (TCJA), was signed into law on December 22, 2017, and was intended to reform the tax code for individuals and businesses by implementing pro-growth tax reform through lowered tax rates. One of the more beneficial provisions enacted allows taxpayers to fully deduct the cost of qualifying asset purchases (100% Bonus Depreciation). The allowable percentage will decline by 20% per year beginning in 2023 and phases out entirely in 2027. With the reduction of bonus depreciation, taxpayers should consider how the Section 179 expense deduction can benefit them.
Bonus depreciation is mandatory and allows for a percentage of an eligible asset’s cost to be deducted in the year it was purchased. While mandatory, an election can be made to opt out of bonus depreciation, and in certain instances, this could be beneficial for taxpayers. For tax year 2024, the bonus depreciation percentage is 60%. In contrast, the Section 179 election gives taxpayers an opportunity to expense all or part of the cost of qualifying property. However, there are limitations that are discussed below.
The election is only available to corporate taxpayers and individuals, partnerships and limited liability companies that are active participants in a trade or business. Passive investors do not qualify but generally, there is a low bar to meet the active participation requirement. The Section 179 expense deduction is not available for trusts, estates and certain non-corporate lessors.
Significant differences between bonus depreciation and the Section 179 deduction include:
| Bonus Depreciation | Section 179 Deduction | |
|---|---|---|
| Amount Allowed | Tax year 2024 60% of asset cost with no annual cap | Up to 100% of asset cost with annual maximum of $1,220,000 for 2024 |
| Taxpayer Eligibility | Generally, all taxpayers except those required to use the Alternative Depreciation System | Individual and corporate taxpayers; LLCs, partnerships, and S Corporations pass the deduction through to their owners |
| Income Limitation | None | Limited to active trade or business income |
| California Conformity | Not allowed for California | Allowed but limited to $25,000 |
For further details, see our previous blog post, Planning for 2023: Revisiting Depreciation Alternatives
To qualify for the Section 179 expense deduction, taxpayers must determine if the newly placed-in-service property is qualified property and that the asset acquisition cost limitation and income limitation have been met.
Qualifying Section 179 property includes, but is not limited to, property that is:
- Acquired for business use;
- Acquired by purchase; and
- Is considered eligible property, including:
- Tangible personal property;
- Certain agricultural or horticultural structures;
- Off-the-shelf computer software; and
- Qualified Section 179 real property, which includes:
- Qualified improvement property – defined as an improvement to an interior portion of a nonresidential building placed in service after the date the building was first placed in service; and
- Certain improvements to nonresidential real property such as HVAC equipment, roofs, fire protection, alarm and security systems placed in service after the date property was first placed in service.
In addition, Section 179 eligibility includes an annual eligible property dollar limitation that if exceeded will either limit or entirely negate the allowable deduction. This limit is adjusted annually by the IRS. For tax year 2024, the Section 179 expense deduction is limited to a maximum of $1,220,000. In addition, the deduction is phased out based on the total cost of the qualified assets acquired during the year.
2024 Section 179 Dollar Limitations
Cost of Qualified Purchases | Deduction Amount |
|---|---|
$0 - $3,049,999 | Maximum of $1,220,000 |
$3,050,000 - $4,270,000 | Dollar-for-dollar reduction |
Over $4,270,000 | No deduction |
In addition to the annual purchase amount limitation, there is an annual income limitation. The deduction is limited to the taxable income of the corporation or the active trade or business income of individuals. The income limitation is calculated excluding the deduction itself. Any Section 179 deduction that is limited is eligible to be carried forward for an unlimited number of years for use in future tax years.
The main considerations for electing Section 179 deduction instead of bonus depreciation include the multiple limitations, the active trade or business requirement and the specific assets acquired. Another consideration is potential new legislation. There is currently a bill (stuck) in the Senate to reinstate 100% bonus depreciation and Congress is very likely to pass tax legislation in 2025 so bonus depreciation may be changing.
If you have any questions on how Bonus depreciation or the Section 179 election can help you, please reach out to Nick Price or another member of the ASL Real Estate Group.
About the Author
Nick Price
Nick Price, CPA, is a Tax Manager in ASL’s Real Estate Group. He has over eight years of experience in public accounting specializing in partnership…
