Both Section 179 Expensing and Bonus Depreciation are powerful tax incentives for businesses to deduct the cost of “qualifying property” or equipment purchases, but they differ in their rules and applications.
Before drilling down more into these, “qualifying property” generally includes things you use to run your business, such as computers, machinery, furniture, vehicles or software. Basically, it’s any tangible asset with a useful life of more than a year—so think about items that improve your business setup or operations. Even certain improvements to non-residential property (like HVAC systems, fire alarms, and security systems) may qualify.
Section 179 Expensing
Section 179 of the Internal Revenue Code allows businesses to deduct the full purchase price of qualifying equipment or property in the year it is placed in service, rather than spreading the deduction over several years through depreciation.
Key Features:
- Annual Limit: In 2024, businesses can deduct up to $1.16m of qualifying purchases. However, this is subject to a spending cap of $4.05 million. If total purchases exceed the cap, the deduction is reduced dollar-for-dollar.
- Qualifying Property:
- Equipment and machinery (new or used).
- Business vehicles (over 6,000 pounds gross weight) purchased in the business name for business use – I know that the Porsche Cayenne falls into this category BUT it must be used more than 50% for business purposes to be eligible for these deductions.
- Software used for business purposes.
- Improvements to non-residential property, such as HVAC systems, fire alarms, and security systems.
- Flexibility: You can choose which assets to expense under Section 179 and depreciate others.
What This Could Look Like
- You purchase $100,000 of equipment in 2024.
- Under Section 179, you can deduct the entire $100,000 in the same year, reducing your taxable income by this amount.
Bonus Depreciation
Bonus depreciation allows businesses to deduct a percentage of the cost of qualifying assets upfront. Unlike Section 179, it has no annual spending limit or income requirement, making it especially useful for larger businesses with significant investments.
Key Features:
- Deduction Percentage:
- For 2024, the deduction stands at 80%, with further reductions planned (60% in 2025, 40% in 2026, and so on).
- Qualifying Property:
- New and used property that has a useful life of 20 years or less (e.g., equipment, machinery, computers, and certain furniture).
- Does not apply to land or buildings, though some improvements like roofs and HVAC systems may qualify.
- No Income Limits: Bonus depreciation is not limited by the business’s income or total asset purchases, unlike Section 179.
WARNING: Bonus depreciation is a federal benefit, but state rules vary widely.
What This Could Look Like
- You purchase $500,000 of equipment in 2024.
- With 80% bonus depreciation, you can deduct $400,000 (80% of $500,000) in 2024, with the remaining $100,000 depreciated over the equipment’s useful life.
Differences Between Section 179 and Bonus Depreciation
| FEATURE | SECTION 179 EXPENSING | BONUS DEPRECIATION |
|---|---|---|
| Deduction limit | $1.16 million (2024) | No limit |
| Spending Cap | $4.05 million (2024) | No cap |
| Qualifying Property | New or used equipment, software, improvements | New or used property with a useful life ≤ 20 years |
| Partial Deduction | Can choose specific assets | Must apply to all eligible property purchased in the year |
| Carryover | Unused deduction carries forward | No carryover |
| Tax Deductible | Federal and State | Federal but not always State |
Which is Better for Your Business?
- Section 179 is ideal for smaller businesses or those needing flexibility in choosing specific items to expense.
- Bonus Depreciation is often better for larger businesses with high spending on qualifying property, as it allows deductions without an upper limit.
That said, business can actually use both, for example, you can use Section 179 to deduct specific assets first (up to the limit) and apply bonus depreciation to the remaining qualifying assets.
So, if you know you’ll need new equipment or upgrades, now’s a smart time to make those purchases. Just be sure to place them in service (meaning they’re ready and available for use) before December 31 to get the deduction for this year.
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