Depreciation is when a physical asset (such as furniture and equipment) loses its value due to normal use over time. Traditionally, businesses write off the cost of an asset over its total useful life, matching the expense with the use of the asset. Calculations are unique for every individual company and should be based on careful consideration of the implications for the current year as well as future years.
Section 179 of the U.S. internal revenue code allows businesses to immediately deduct the full cost of a physical asset. Similarly, thanks to the Tax Cuts and Jobs Act of 2017 (TCJA), bonus depreciation encourages businesses to invest invest in new equipment to receive an immediate tax benefit.
Both deductions allow for big write-offs in the year an asset was placed in service. Also, both deductions can be applied to new and used tangible property that was not inherited or gifted.
There are differences between the two methods.
Section 179 offers greater flexibility. The Section 179 deduction limit for 2021 was raised to $1,050,000 with an equipment spending cap of $2,620,000.
On the other hand, bonus depreciation has no limitations but may force a company to “waste” depreciation value that could benefit the business in future years. With Section 179, we can decide which assets and how much of those assets to cover or save, allowing owners to fine-tune their company’s bottom line.
Bonus depreciation is scheduled to be reduced and eliminated. A business can write off up to 100% of the cost of eligible property purchased after September 27, 2017 and before January 1, 2023. However, that 100% limit will begin to phase down after 2022. Starting in 2023, the rate for bonus depreciation will be 80% in 2023, 60% in 2025, and will be eliminated in 2027. If bonus depreciation is reduced and eliminated as scheduled, then the importance of sec. 179 will return for many business owners in the future.
Schedule an appointment so we can help your business make the most of your money with an optimal combination of depreciation write-offs. Review our services for other opportunities to help your business save money with Bernstein Financial.