Usually when your shop buys a piece of equipment, vehicle, or other asset, you would spread the tax deduction over the asset’s “life” – 5, 7, or 15 years. However, with Section 179 and Bonus Depreciation, you don’t have to wait. These are two ways to get your tax deduction up front. But do you know which one to use and when?
LIMITS
Section 179 allows shop owners to deduct the entire cost of an asset as an expense on their taxes in the first year it is put to use. The maximum deduction for 2021 is $1,050,000 and cannot be larger than your shop’s annual income. So, if you spend $80,000 on a piece of equipment, but your shop’s net income is $70,000, you can only deduct $70,000 of that equipment. Also, if you spend more than $2.62 million on a piece of equipment, the amount you can deduct begins to decrease. Bonus Depreciation does not have this restriction – any unused deduction will carry forward as a future tax break.
FLEXIBILITY
Under Section 179, you can choose which purchases you wish to deduct, and which to save for future tax breaks. You are even able to split the deduction for individual items. For example, if you bought 6 computers but only wanted to claim 3 under Section 179, you are able to do that. If you bought a vehicle and only wanted to claim half the cost while spreading the other half over time, you can do that too. With Bonus Depreciation, you can only claim a class of purchases – so those 6 computers would be all or none under Bonus Depreciation, and you’d have to deduct that entire vehicle.
QUALIFYING ASSETS
Section 179:
➝ Tangible property (building, equipment, etc)
➝ Leasehold improvements (repairs or changes made to building or property)
Bonus Depreciation:
➝ New or used property (not land or buildings) with a useful life of 20 years or less
For more information, see our previous blogs on Bonus Depreciation and Section 179.
To read more about state conformity to Section 179, click here.
It’s worth noting that you can use both Section 179 and Bonus Depreciation in the same year for different assets. Work with your accountant to find which combo will get you the best tax deductions for your shop.
