Section 179 vs Bonus Depreciation on Business Vehicles

Understanding Section 179 and Bonus Depreciation

For many small businesses, understanding and navigating the world of tax deductions can be a daunting task. However, two of the most beneficial tax deductions that small businesses can take advantage of are Section 179 and Bonus Depreciation. These deductions can significantly reduce the tax burden and improve the cash flow of a business.

What is Section 179?

Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. This means that if you buy or lease a piece of qualifying equipment, you can deduct the full purchase price from your gross income. It's important to be aware that there are limitations to be considered.

Benefits of Section 179

The Section 179 deduction has a real impact on your equipment costs. It encourages businesses to invest in themselves by purchasing equipment and improving their operations. The full deduction can be taken in the year that the equipment is put into service, which can significantly reduce the business's tax liability for that year.

What is Bonus Depreciation?

Bonus depreciation is another tax incentive that allows a business to immediately deduct a large percentage of the purchase price of eligible business assets, rather than write them off over the "useful life" of that asset. Unlike Section 179, bonus depreciation is not capped at a certain dollar level.

Benefits of Bonus Depreciation

Like Section 179, bonus depreciation stimulates business growth and profitability by decreasing taxable income in the year of purchase. The Tax Cuts and Jobs Act has temporarily increased the bonus depreciation percentage to 100% for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023.

Section 179 vs. Bonus Depreciation

While both Section 179 and bonus depreciation allow for significant capital investments to be fully expensed in the year they are made, there are differences between the two. Section 179 allows a business to expense a cost of qualifying property up to a certain limit, whereas bonus depreciation allows for 100% expense of qualifying property with no spending cap.

Conclusion

Understanding and taking advantage of tax incentives like Section 179 and bonus depreciation can significantly reduce your small business's tax burden. However, navigating these tax codes can be complex, and it's always a good idea to consult with a tax professional to ensure you're making the most of these benefits.