Maximizing your deductions: Section 179 and Bonus Depreciation

January 25, 2023

Don't miss out on potential tax benefits for 2023.

 

Businesses have ongoing incentives to acquire and install capital equipment. The Tax Cuts and Jobs Act of 2017 made significant changes to both Section 179 and bonus depreciation. These changes continue to be in effect for 2023 and when used together may allow businesses to deduct up to 100% of capital purchases. However, it will only be 100% if the amount of the equipment is under the phase-out threshold and can be expensed solely under Section 179.  If it's over the limit and/or threshold, bonus depreciation will kick in, which is only 80% for 2023.

Read on for an overview of both deductions and how they could save you money during this tax year.

 

What is Section 179, and how has it changed?

Internal Revenue Code Section 179 allows businesses to expense the full purchase price of qualifying equipment and/or software purchased during the tax year. When you buy a piece of qualifying equipment, you may be able to deduct the full purchase price on your business income tax return.

Before the TCJA, the government capped business taxpayers’ Section 179 deduction at $500,000, with a phase-out beginning at $2 million. The new Act raised the deduction limit to $1 million and the phase-out threshold to $2.5 million, including annual adjustments for inflation. In 2023, the Section 179 benefits apply to small and mid-size businesses that spend less than $4.05 million per year for equipment.

What is changing in 2023?

2019

2020

2021

2022

2023

Section 179 Maximum Deduction

$1,000,000

$1,040,000

$1,050,000

$1,080,000

$1,160,000

Phase-out threshold

$2,500,000

$2,590,000

$2,620,000

$2,700,000

$2,890,000

Bonus Depreciation

100%

100%

100%

100%

80%

Equipment

New and used for both

New and used for both

New and used for both

New and used for both

New and used for both

What is Bonus Depreciation

Bonus Depreciation, is an additional first-year depreciation allowance. According to the Internal Revenue Service (IRS), bonus depreciation allows business taxpayers to deduct additional depreciation for the cost of qualifying business property, beyond normal depreciation allowances. It’s intended to spur capital purchases by all business taxpayers, small, mid-sized and large.

Before the TCJA, the IRS limited Bonus Depreciation to new equipment. The law now allows for depreciation on used equipment, though it must be “first use” by the purchasing business. The rules allow Bonus Depreciation to 100% for all qualified purchases made between September 27, 2017 and January 1, 2023. Bonus Depreciation now ramps down to 80%, starting in 2023. Bonus depreciation will continue to ramp down for ensuing years: 60% for 2024, 40% for 2025, 20% for 2026, and 0% beginning in 2027.

 

How can both deductions work together?

While each deduction can help businesses deduct purchasing costs for their property, combining them can offer the greatest possible benefits. IRS rules require that most businesses apply Section 179 first, followed by bonus depreciation.

Here’s why you might consider using both deductions: 

  • Limited circumstances for stand-alone 179 benefits.
    The Section 179 expense limit and phase-out threshold (inflation-adjusted to $1,160,000 and $2,890,000, respectively, for 2023) are now permanent parts of the tax code. However, since Bonus Deprecation now covers new and used equipment, the benefits of Section 179 by themselves would only apply to taxpayers with specific business circumstances.

  • Short-term consistency with the bonus depreciation limit.
    With the Bonus Depreciation percentage set at 80% for 2023, and ramping down further in subsequent years, businesses have greater incentive to make near-term purchases.

  • Expands qualifying equipment beyond physical hardware.
    Qualified equipment includes software, which may mean that companies that aren’t necessarily purchasing heavy equipment can benefit from the Section 179 and bonus depreciation rules. Also note that equipment investments exceeding $4,050,000 are not eligible for any Section 179 deduction, but may still be eligible for bonus depreciation.

 

Calculate your potential savings

If you’re wondering how Section 179 and bonus depreciation could affect your business tax deductions, check out the calculator below.

2023 Example

  

Cost of equipment

$3,000,000

Section 179 deduction

$1,050,000

Bonus depreciation deduction

$1,560,000

Standard first year depreciation (assuming 5-year MACRS property)

$78,000

Total first year deduction

$2,688,000

Cash savings on purchase (assuming 21% C-Corp tax bracket

$564,480

Lowered cost of equipment (after tax savings)

$2,435,520

If you’re wondering about how these deductions could affect your equipment financing strategy, we can help. Contact Equipment Finance.

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U.S. Bank does not offer tax advice. Contact a qualified tax professional familiar with your specific business circumstance for advice and information regarding how these new rules may apply.


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