Updated November 21, 2023.
When your business buys a piece of equipment, you’re supposed to spread the tax deduction over the asset’s life. But why wait? The Section 179 deduction and bonus depreciation are two ways to get your entire tax break upfront.*
Bonus Depreciation vs. Section 179
So what’s the difference between Section 179 and bonus depreciation? Section 179 lets business owners deduct a set dollar amount of new business assets, and bonus depreciation lets them deduct a percentage of the cost. In the past, bonus depreciation only covered 50% of an asset’s cost upfront, but as of the 2020 bonus depreciation rules this is now 100%, so now both methods let you deduct the entire cost in the same year. Based on the 2020 Section 179 rules, Section 179 gives you more flexibility on when you get your deduction, while bonus depreciation can apply to more spending per year.
When considering Section 179 vs. bonus depreciation, how do you know which works best for your business? We break down the main factors:
Key Points for Section 179 Deduction
Section 179 deduction allows a taxpayer to elect to deduct the cost of certain types of property as an expense on their income taxes, meaning the cost of the property doesn’t have to be capitalized and depreciated. Here’s what that means for you.
- Annual limit on deduction: The maximum Section 179 deduction for 2023 is $1,160,000. If your business spends more than $2,890,000 on a piece of equipment, the amount you are eligible to deduct starts to decrease.
- Flexibility with timing: You can choose which purchases to cover under the Section 179 deduction and which to save as future tax breaks. You can even split the deduction for individual purchases. For example, claiming half the cost of a new car upfront while spreading the rest of the purchase over time.
- Covers improvement to real estate: You can use the Section 179 deduction for real estate upgrades, like adding a new roof to your building. Bonus depreciation does not cover this category.
Key Points for Bonus Depreciation
- No annual limit on deductions: This deduction isn’t limited to cost, a stark difference between Section 179 and bonus depreciation. You can deduct your entire investment no matter how much you spend per year.
- Can be larger than your business income: While a Section 179 deduction cannot be larger than your annual business income, bonus depreciation does not have this restriction. You can carry any unused deduction forward as a future tax break.
- Less flexible, must apply to all assets: Unlike the Section 179 deduction, bonus depreciation must apply to 100% of an asset’s cost and all assets must be in the same category. If you use bonus depreciation for one 5-year asset, you’ll need to use it for all 5-year assets bought that year.
- Changes for next year: Starting on January 1, 2024, bonus depreciation decreases by 20% and will decrease by 20% through 2027 when the program closes. Businesses can claim up to 80% in bonus depreciation for 2023. So it’s better to make qualifying purchases sooner rather than later.
As a final note, you can use both bonus depreciation and the Section 179 deduction in the same year. Consult with your accountant to see what combo will deliver the most bang for your small business tax write-offs. To learn more about purchasing or leasing equipment to use with Section 179 deductions, read our guide on Section 179 for equipment.
*Some deductions listed may not be available to your small business. Consult with your tax advisor before claiming a deduction on your tax return.