Question

How the section 179 and bonus depreciation deductions work. Include in your discussion:

1. What types of property are eligible under each?

2. Are there any limits on the deduction? If so, can you carry over any amounts to future years?

3. What will happen to the bonus depreciation deduction in future years?

4. Why would Congress implement these types of deductions?

5. Can you use both at the same time? If so, how does that work?

Answer 1

Section 179 and Bonus depreciation deductions work

Eligible properties:

• Machinery and equipment
• Business vehicles with a gross weight between 6,000 and 14,000 pounds
• Business personal property that isn't physically attached to a building (everything from office furniture and equipment to computers to free-standing shelves)
• Listed property that can be used for both business and personal purposes
• Costs of improvements to a business building interior and for fire suppression, alarms and security systems, HVAC, and roofing

Limits on deduction:

• For 2019 business tax purposes, the annual limits on Section 179 deductions are $1.02 million on individual items of equipment and purchased computer software and $25,500 for sport utility vehicles. Your business can spend up to a maximum of $2.55 million on Section 179 equipment. The deduction is reduced above this amount.

  For 2020, the maximum deduction for an individual asset is $1.04 million, with a company total of $2.59 million. The sport utility vehicle limit is $25,900. These limits are indexed to inflation and may change each year.

How it's working?

The IRS has two general requirements for business property that is qualified for a Section 179 deduction. To begin, the property (called qualified property) must be tangible, depreciable, personal property acquired for use in the active conduct of a trade or business.You can only use the Section 179 deduction for property used more than 50% for business purposes, and you can only deduct the percentage of business use. For example, if you buy a car for your business travel and use it 60% of the time for business, you can take a Section 179 deduction for 60% of the car's cost.

Bonus depreciation deductions

The IRS set up Section 179 deductions to help businesses by allowing them to take a depreciation deduction for certain business assets—like machinery, equipment, and vehicles—in the first year these assets are placed in service. The concept of depreciation for an asset is to spread the cost of using the asset over a number of years (the asset's useful life) by taking a tax deduction for part of the cost each year.

Section 179 deductions speed up the deduction, taking all of the cost as a deduction in the first year. In addition to taking a Section 179 deduction, you may also be able to take an additional first-year bonus depreciation of 100% on business property that is new to your business. Bonus depreciation remains at 100% until January 1, 2023.