and are powerful tax strategies for businesses. They allow companies to deduct the full cost of qualifying equipment and property in the year of purchase, rather than spreading it out over time.
These accelerated deduction methods can significantly reduce taxable income and boost cash flow. However, they come with specific rules, limitations, and strategic considerations that businesses must carefully navigate to maximize their tax benefits.
Section 179 Expensing
Concept and Eligibility
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Section 179 expensing allows businesses to deduct the full purchase price of qualifying equipment and purchased or financed during the tax year instead of depreciating it over time
Eligible property includes tangible personal property used in trade or business (machinery, equipment, vehicles)
Property must be acquired for business use and placed in service during the tax year for which the deduction is claimed
Taxpayer must have taxable income from active trade or business to claim the deduction
Cannot be used to create or increase a net operating loss
Limitations apply to total amount that can be expensed in a given tax year
Phase-out thresholds based on total qualifying property placed in service
Special Rules and Considerations
Sport utility vehicles subject to specific limitations on deduction amount
Listed property (computers, vehicles) must meet strict business use requirements
Property used for both business and personal purposes requires allocation of deduction based on percentage of business use
Certain real property improvements qualify (roofs, HVAC systems, fire protection systems)
Carryover of disallowed deduction from previous years allowed, subject to same limitations as current year
Interaction with bonus depreciation must be considered when determining allowable deduction
Maximum Section 179 Deduction
Annual Limits and Adjustments
Maximum deduction subject to annual inflation adjustments
Can change from year to year based on tax legislation
For 2023, maximum deduction is $1,160,000
Dollar-for-dollar phase-out begins when total cost of qualifying property exceeds $2,890,000 (2023)
Deduction limited to taxpayer's aggregate taxable income from active conduct of any trade or business during tax year
Calculation and Special Situations
Calculate maximum deduction:
MaximumDeduction=Lesserof(Section179Limit,QualifyingPropertyCost,TaxableBusinessIncome)
Consider any carryover from previous years in calculation
Special rules for married individuals filing separate returns
Each spouse treated as separate taxpayer
Deduction limit split between spouses unless otherwise elected
Controlled groups must allocate deduction among members
Pass-through entities (partnerships, S corporations) allocate deduction to partners or shareholders
Subject to individual partner/shareholder limitations
Bonus Depreciation
Concept and Eligibility
Allows businesses to deduct large percentage of cost of eligible assets in year placed in service
Percentage varies based on tax year and legislation
Recent years allow up to 100% bonus depreciation for certain property
Eligible property includes new and used property with recovery period of 20 years or less