Depreciation allows businesses to spread the cost of expensive assets over their useful life, accounting for wear and tear while reducing taxable income through annual deductions. This approach helps manage cash flow, ensures tax compliance, and prevents financial strain from large one-time expenses.
Businesses have multiple depreciation options, each with distinct benefits. While traditional methods like straight-line depreciation spread costs evenly over an asset’s life, accelerated methods such as the Modified Accelerated Cost Recovery System (MACRS) allow businesses to recover costs more quickly by applying higher deductions in the earlier years of an asset’s use.
However, Section 179 and bonus depreciation offer the most immediate tax advantages. Section 179 enables businesses to deduct the full cost of qualifying assets upfront, within annual limits, while bonus depreciation provides a significant first-year deduction but is gradually phasing out in the coming years. Understanding the differences between these two options is essential for maximizing tax savings and optimizing financial planning.
Bonus Depreciation
Bonus depreciation allows businesses to deduct a significant portion of an asset’s cost upfront, but the allowable percentage has been decreasing. The deduction dropped from 100% in 2023 to 80% in 2024 and will continue declining—60% in 2025, 40% in 2026, 20% in 2027—before phasing out entirely by 2028. These changes will significantly impact businesses that depend on large upfront deductions to manage cash flow and reduce taxable income.
Proper timing is essential to maximize deductions. Assets must be placed into service before the end of the tax year to qualify for that year’s bonus depreciation rate. If a business purchases equipment in December 2025 but does not use it until January 2026, it will be subject to the lower 40% deduction rather than the 60% available in 2025.
To qualify for bonus depreciation, property must meet specific criteria. It must be depreciable under Internal Revenue Code Section 168 and have a recovery period of 20 years or less. Additionally, the property must have been acquired and placed in service after September 27, 2017. To be eligible, it cannot be used predominantly outside the United States or fall into certain restricted categories, such as property used for entertainment, recreation, or amusement.
Under the changes introduced by the Tax Cuts and Jobs Act (TCJA), property must either be new and placed in service for the first time by the taxpayer or be previously used property that meets specific acquisition requirements. The original use criterion is satisfied when the taxpayer is the first to place the property in service.
For property to qualify under the used property requirement, the acquisition must satisfy five conditions. First, the taxpayer or a predecessor must not have previously used the property. Second, the property cannot be acquired from a related party or a member of a controlled group. Third, the taxpayer’s basis in the property cannot be derived, in whole or in part, from the seller’s or transferor’s adjusted basis. Fourth, the property’s basis cannot be determined under section 1014(a) or 1022, which apply to inherited property. Finally, the cost of the property must not include a basis determined by referencing the basis of other property previously held by the taxpayer.
Section 179
Section 179 of the Internal Revenue Code allows businesses to deduct the full cost of qualifying equipment and software in the year it is purchased and put into service. Unlike traditional depreciation, which spreads deductions over several years, Section 179 enables businesses to take an immediate deduction, providing significant tax savings and improving cash flow.
For 2025, the maximum Section 179 deduction is set at $1,250,000, with a phase-out threshold beginning at $3,130,000. Once a business purchases more than $3,130,000 in qualifying assets, the deduction is reduced dollar-for-dollar. If total purchases exceed $4,380,000, the Section 179 deduction is entirely phased out. Businesses exceeding the threshold may still benefit from bonus depreciation, which allows them to deduct a portion of the remaining costs.
Section 179 applies to both new and used equipment, if the asset is primarily used for business purposes (more than 50% of the time). Eligible items include machinery, office furniture, computers, and certain vehicles. Specialized work vehicles, such as cargo vans and heavy-duty trucks, are generally treated like equipment with no special limits. However, SUVs and trucks weighing more than 6,000 pounds but less than 14,000 pounds have a first-year deduction cap of $31,300, with the remaining cost depreciated over time.
One of the key advantages of Section 179 is its flexibility in tax planning. Businesses expecting higher taxable income in 2025 can take full advantage of the deduction to immediately reduce their tax liability. However, Section 179 deductions are limited to a business’s annual taxable income, meaning a company cannot deduct more than its earnings for the year. In contrast, bonus depreciation has no such limitation and can be used to generate a net loss. If a Section 179 deduction exceeds taxable income, the unused portion can be carried forward to future tax years. This ensures that even if a business cannot fully utilize the deduction in the current year, it can still apply the remaining balance when income increases, maximizing long-term tax benefits.
Section 179 and bonus depreciation provide valuable tax-saving opportunities, each with unique benefits in terms of deduction limits, timing, and income restrictions. While Section 179 remains a permanent fixture in the tax code with annual inflation adjustments, bonus depreciation is gradually decreasing and will phase out in the coming years. Understanding how these changes impact your business can help you maximize deductions and optimize cash flow. To explore the best strategy for your situation, contact your Stephano Slack tax manager or partner at 610-687-1600 or TaxInfo@StephanoSlack.com.
Author Jennifer Crawford, CPA, is a manager dedicated to helping high-net-worth individuals and small to middle-market businesses navigate complex tax matters, focusing on family-owned businesses. Known for her strategic thinking and expert insights, Jennifer works closely with her clients to develop customized tax planning strategies that maximize savings and reduce tax liabilities. Her deep understanding of tax regulations and proactive approach helps clients remain compliant while fully leveraging opportunities to save. To discover how Jennifer can help you implement tax-saving strategies, contact her at 610-687-1600 or jcrawford@stephanoslack.com.
Disclaimer: This content is for informational purposes only and doesn’t constitute professional advice
Recent Comments