What Is Section 179 and Bonus Depreciation?
The amount of the Section 179 deduction for the 2019 tax year is $1 million; it increases to $1.04 million for the 2020 tax year. However, Section 179 limits how much companies can spend on equipment to qualify for the full deduction.
In 2020, the spending limit is $2.59 million, up from $2.5 million last year. Every dollar spent above the limit must be subtracted from the deduction. The deduction was originally limited to $25,000, and for most small businesses, that was more than enough. But since 2003, lawmakers have steadily increased the deduction to encourage businesses to invest in their companies, while helping to stimulate the economy.
Companies can also apply 100 percent bonus depreciation for the 2019 and 2020 tax years, which increases the amount of technology and other equipment that companies can deduct each year.
Technology that qualifies for the tax breaks includes servers, computers, tablets, networking equipment and off-the-shelf software. Office equipment, furniture, alarm and security systems, and some vehicles also apply.
How the Section 179 Deductions Work
Companies can use Section 179 and bonus depreciation alone or in combination to write off as much as they can in a single year. For example, if a business in 2019 purchased $2.6 million in equipment, that is $100,000 over the Section 179 spending limit. They can deduct $900,000 immediately using Section 179 and then immediately write off the remaining $1.7 million in equipment spending or choose to deduct the $1.7 million over the normal depreciation schedule.
There are some differences between the two tax credits, which may cause businesses to use one or the other. For example, companies cannot use Section 179 to create a loss or if they operate at a loss. But businesses that operate at a taxable loss still qualify for bonus depreciation. Some businesses may want to increase a loss to offset income from other sources. Net operating losses can also be forwarded into the next year.
Companies should consult their accountants on whether to take advantage of Section 179 or the bonus depreciation because it may not make the most financial sense to take the entire tax write-off up front, says Julian Block, a tax attorney in Larchmont, N.Y.
A company may derive more financial benefit if it expenses the equipment under the conventional depreciation methods rather than all at once, Block says.
“A company that is just starting out and getting things going the first year may wind up with a loss and no tax liability, and it would be preferable to forego the immediate expensing,” he says.