As we get closer to year-end, it’s a good idea to consider first-year expensing for eligible property and equipment already purchased and any anticipated purchases before year-end. In 2023, there are two options for businesses to take accelerated first-year depreciation deductions: (1) Section 179 and (2) bonus depreciation. 

Section 179 Deduction 

IRC Section 179 allows a first-year depreciation deduction equal to 100% of the cost of qualifying property placed in service in the year. For 2023, the Section 179 deduction limit is $1,160,000. If a business purchases more than $2,890,000 of qualifying property in 2023, the Section 179 deduction limit will be reduced. 

Qualifying property is generally defined as tangible personal property used in a trade or business. Both new and used property qualify. Qualified property includes computers, furniture, equipment, machinery, off-the-shelf software, and some business vehicles. Qualifying property also consists of some types of improvements made to non-residential real estate, including roofs, HVAC, and qualified leasehold improvements. 

Bonus Depreciation 

Bonus Depreciation under IRC Section 168 allows a first-year depreciation deduction equal to 80% of the cost of qualifying property placed in service in 2023. There are no limits to the amount bonus depreciation that can be deducted each year. 

The remaining 20% is depreciated using normal tax depreciation methods based on the type and life of the asset.  

Under current law, the 80% limitation decreases by 20% each year through 2026. 

Most of the same types of assets eligible for Section 179 are also eligible for bonus depreciation. However, the eligible property isn’t the same, so verify eligibility before purchasing. 

Timing of Deduction

To qualify for either Section 179 or Bonus depreciation, the property must be “placed in service” during the year. Ordering or making a deposit to purchase an asset is insufficient to take a deduction. This becomes very important as you get close to year-end.  

Important Differences between Section 179 and Bonus Depreciation 

Generally, the total Section 179 deduction is limited to the amount of profit from the business. Bonus depreciation can exceed the profit of the business and can create a loss. 

For pass-through entities, the Section 179 deduction may not benefit all the owners every year. The Section 179 deduction passes through to the owners separately from the ordinary income from the business. This means the Section 179 deduction could be disallowed or limited based on other items on the owner’s tax return. For example, if one of the owners has ordinary losses from other businesses, the Section 179 deduction could be reduced. On the other hand, Bonus depreciation is an automatic reduction in ordinary income, and the net amount is passed through to the owners.

The Section 179 deduction is elected on an asset-by-asset basis. A business could elect Section 179 depreciation on some eligible assets but not others. However, Bonus depreciation applies by default to all eligible assets unless a business makes an election not to claim the bonus depreciation on a class-by-class basis. 

A business could elect not to take bonus depreciation for assets in the five-year class while still taking bonus depreciation on all other classes of assets.  

As you can see, the rules surrounding Section 179 and Bonus depreciation can be complicated at times. If your business plans to make significant asset purchases, call your Dent Moses advisor.