Now that you know about Section 179, it’s also important to know about Bonus Depreciation. Bonus Depreciation is another incentive that allows businesses to immediately deduct a percentage of the purchase price of eligible assets, rather than write them off, over the useful life of the asset. It’s not offered every year, but for 2021 it’s being offered at 100%, meaning it’s possible to deduct the entire purchase from your 2021 tax obligations. It’s common practice to take your Section 179 deduction followed by Bonus depreciation.
The deductible percentage is as follows:
- 100% for property placed in service before 1/1/2023
- 80% for property placed in service after 12/31/2022 and before 1/1/2024
- 60% for property placed in service after 12/31/2023 and before 1/1/2025
- 40% for property placed in service after 12/31/2024 and before 1/1/2026
- 20% for property placed in service after 12/31/2025 and before 1/1/2027
- And currently scheduled to sunset after 12/31/2026
The great part about both Section 179 and bonus depreciation is that they’re both accelerated deductions meant to allow your business more control of its taxable income. You can use just one, or both, giving your business flexibility with how it wants to manage the books. Both tax regulations are applicable to new and used assets, and there are no limitations on deductions for significant assets placed in service later in the year.
Do keep in mind you will recognize the same net income regardless of which method you choose, and once you’ve taken the big deduction you’ll still have the remaining years of income to pay taxes on. If your portfolio of depreciable assets starts to decline, your tax related liability could become substantial. To avoid this, know when you will have to pay the tax so you can align your depreciable assets in a way that will allow for consistent cash flow. To learn further details regarding Section 179 and bonus depreciation, review the IRS’s new rules and limitations.
For a more in-depth explanation of Section 179 and how to know if you qualify, read our Section 179 Tax Deduction article.