Updated November 11, 2024.
When your business buys a piece of equipment, you’re typically supposed to spread the tax deduction over the life of the asset. But why wait? The Section 179 deduction and bonus depreciation are two ways to get your entire tax break upfront.*
Bonus Depreciation vs. Section 179
What’s the difference between Section 179 and bonus depreciation? Section 179 lets business owners deduct a set dollar amount of new business assets for tax purposes, and bonus depreciation lets them deduct a percentage of the cost. Typically, both tax benefits can be used together, though you’ll often find businesses utilize bonus depreciation once they have reached the Section 179 limit. In 2024, bonus depreciation is up to 60% of the purchase cost. Based on the 2024 Section 179 rules, Section 179 gives you more flexibility on when you get your deduction, while bonus depreciation can apply to more spending per year.
When considering Section 179 vs. bonus depreciation, how do you know which works best for your business? Let’s break down the main factors:
Key Points for Section 179 Deduction
The Section 179 deduction allows a taxpayer to deduct the cost of certain types of assets as an expense on their income taxes, meaning the cost of the equipment doesn’t have to be capitalized and depreciated. Here’s what that means for you:
- Annual limit on deduction: The maximum Section 179 deduction for 2024 is $1,220,000. If your business spends more than $3,050,000 on a piece of equipment, the amount you are eligible to deduct starts to decrease.
- Flexibility upfront: Section 179 allows you to deduct the entire purchase cost of qualifying equipment upfront, rather than claiming a portion over several years.
- Covers improvement to real estate: You can use the Section 179 deduction for real estate upgrades, like adding a new roof to your building. Bonus depreciation does not cover this category.
Key Points for Bonus Depreciation
- No annual limit on deductions: This deduction isn’t limited by cost, a stark difference between Section 179 and bonus depreciation. You can deduct up to 60% of your entire investment no matter how much you spend per year.
- Can be larger than your business income: While a Section 179 deduction cannot be larger than your annual business income, bonus depreciation does not have this restriction. You can carry any unused deduction forward as a future tax break.
- Less flexible, must apply to all assets: Unlike the Section 179 deduction, bonus depreciation must apply to 60% of an asset’s cost. If you use bonus depreciation for one 5-year asset, you’ll need to use it for all 5-year assets bought that year.
- Changes for next year: Bonus depreciation allotments have decreased and will continue to decrease by 20% each year until 2027, when the program closes. For 2024, the depreciation allotment is 60%. So, it’s better to make qualifying purchases sooner rather than later.
As a final note, you can use both bonus depreciation and the Section 179 deduction in the same year. Bonus depreciation can be used in addition to Section 179, especially if you reach the Section 179 limit. Consult with your accountant to see what combination will deliver the most bang for your small business tax write-offs– and don’t forget to take advantage of this benefit by making any purchases before December 31. To learn more about purchasing or financing equipment to use with Section 179 deductions, read our guide on Section 179 for equipment.
*Some deductions listed may not be available to your small business. Consult with your tax advisor before claiming a deduction on your tax return.
