Since Section 179 and bonus depreciation are not mutually exclusive, your business can benefit from both. Learn how to leverage this to your advantage.
Find out more about Business Taxes
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by Naomi Levenspil
A CPA by trade, but a writer at heart, Naomi Levenspil jumps at the chance to exercise the right side of her brain. W...
Updated on: December 6, 2023 · 3 min read
Depreciation occurs when a physical asset loses value over time due to normal use and wear and tear. To reflect this, the IRS requires that businesses write off or depreciate the cost of an asset over the years of its useful life.
Traditional depreciation requires that businesses write off the cost of an asset over its total useful life, matching the expense with the use of the asset. However, some vehicles allow the entire expense to be deducted in the year the asset was placed into service. Bonus depreciation and Section 179 are incentives designed by the IRS to encourage businesses to invest in themselves by purchasing new equipment and receiving an immediate tax benefit.
This is especially beneficial to start-ups that must purchase extensive equipment and can use these deductions for substantial tax relief. While the basic concept for both methods is similar, there are differences between the two methods. The good news is that you can take advantage of both (or one or neither) if you so desire.
While bonus depreciation offers sweeping savings, a Section 179 deduction can be used to fine-tune your company's bottom line. This calculation will be unique for every individual company and should be based on careful consideration of the implications for the current year as well as future years. Consulting a tax professional can save your business a lot of money with the right depreciation strategy.
As a business, you need to consider the fact that by electing to take accelerated depreciation, you are, in essence, relieving your current tax burden by giving up future deprecation in exchange.
You need to therefore weigh when the benefit of depreciation will be most impactful for your company's bottom line. Section 179 offers greater flexibility but also caps the benefit. Bonus depreciation has no limitations but may force a company to “waste" depreciation that it could benefit from in future years.
Accelerating depreciation also lowers the book value of your assets, which can affect balance sheet ratios that may impact your ability to borrow money. Also, should you choose to sell that asset, you may have to pay tax on the gain.
Be aware that some states treat Section 179 and bonus depreciation differently than the IRS. Careful consultation with a tax adviser or an accountant can help your business make the most of your money with an optimal combination of depreciation write-offs.
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