When you buy new equipment for your business, you have the option of expensing the entire cost of that equipment with two different methods: Bonus or Section 179 Depreciation.
Generally, bonus depreciation will let you deduct a percentage of that cost upfront, while Section 179 enables you to deduct a set dollar amount of that asset. Previously, you were only allowed to deduct up to 50% of the equipment cost upfront, but as of 2020, new depreciation rules allow you to deduct 100%. Essentially, both methods allow you to deduct the entire cost in that year. However, Section 179 would give you more flexibility.
With Section 179 deduction, you can choose which asset it applies to and when to take that deduction. For example, you can select to take a portion of the asset cost upfront and spread the rest of the cost over future years. Section 179 also allows a deduction for real estate upgrades, like new flooring or roofing for your buildings—bonus depreciation does not cover this category.
While there are annual limits for Section 179 (currently $1,040,000), bonus depreciation does not have any set limit. You can deduct your entire cost, no matter how large. Section 179 is limited by your annual business income, but bonus does not. You can carry forward any unused deduction. Being less flexible than Section 179, bonus depreciation must be applied to the entire asset cost and all assets in the same category.
For example, if you use bonus depreciation for one 7-year asset, you must use that for all 7-year assets in that year.
You can use both methods in the same year. Depending on the cost and type of asset, it may be advantageous for you to elect both. Our team of professionals at Abacus CPAs, is happy to work with you to provide the best solution for your current and future situations.
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