Section 179 and Tax Impact of Bonus Depreciation for Business Property
Section 179 is a tax law that provides a deduction to business owners. It allows them to deduct the cost of any tangible personal property that they bought and used in their business at least 51 percent of the time. The Tax Cuts and Jobs Act set the initial limit for the deduction at $1 million, which took effect in 2018. Moreover, the Tax Cuts and Jobs Act imposed a $2.5 million limit on the amount spent on purchasing qualifying equipment in a year. Business owners who spend more than $2.5 million on qualifying equipment in a year will face a dollar-for-dollar reduction in their deduction. Both of these limits are adjusted for inflation.
Setting the limit in advance allows business owners to calculate their expenses more systematically. Previously, the annual limit under Section 179 was often set after the tax year had started, such that it applied retroactively. This meant that business owners did not know how much money they could spend on qualifying equipment while still remaining within the range of the deduction.
If an asset qualifies as long-term business property under tax rules, bonus depreciation may allow a business owner to deduct the cost of that asset more efficiently. Bonus depreciation is not subject to any annual limit, and the property does not need to be used in the business at least 51 percent of the time, as with Section 179 property. The tax rules instead require the business owner to place the property in service in the year in which they are seeking a deduction for it. Bonus depreciation initially was set to gradually decline until 2020, when it was scheduled to be eliminated entirely. However, the Tax Cuts and Jobs Act altered this plan. It also extended bonus depreciation to purchases of used property, whereas it previously had applied only to purchases of new property.
The first-year bonus depreciation amount is now set at 100 percent for any long-term asset of a business that was placed in service after September 27, 2017. In other words, you can deduct 100 percent of the cost of that item in the first year after you purchase it. The 100 percent rule will stay in effect until the end of 2022. The Tax Cuts and Jobs Act provides a sequential reduction for bonus depreciation thereafter.
For an asset that is placed in service after December 31, 2022 and before January 1, 2024, the first-year bonus depreciation amount is set at 80 percent. For an asset that is placed in service after December 31, 2023 and before January 1, 2025, the first-year bonus depreciation amount is set at 60 percent. For an asset that is placed in service after December 31, 2024 and before January 1, 2026, the first-year bonus depreciation amount is set at 40 percent. For an asset that is placed in service after December 31, 2025 and before January 1, 2027, the first-year bonus depreciation amount is set at 20 percent. Future tax laws may adjust these complex rules and extend bonus depreciation beyond its currently scheduled expiration date.