Taxpayers generally have two ways to take an immediate write-off for a portion or all of the cost of an acquired capitalized asset. They can claim a tax deduction for a percentage of the cost of the asset (bonus depreciation), or they can claim a deduction for a certain dollar amount of the cost of the asset (Section 179).
Under the TCJA, bonus depreciation increased to 100%, and eligible property was expanded to include not only new property, but the acquisition of used property as well. The amount of bonus depreciation that a taxpayer can claim is not limited to a maximum dollar amount, is not phased out if the taxpayer puts a certain amount of qualifying assets in place in that year, and is not limited to the taxpayer’s business income.
On the other hand, Section 179 expensing is limited to a maximum deduction of $1 million, the deduction is subject to phase out at $2.5 million, and the deduction is limited to the taxpayer’s business income. So why should taxpayers even think about Section 179 when bonus depreciation appears to be a much better way to deduct the cost of otherwise capitalizable/depreciable assets?
Answer: Because the definition of qualifying property under Section 179 was expanded and now allows a taxpayer to deduct certain improvements made to nonresidential real property after the date the real property was first placed in service - assets that are not eligible for bonus depreciation:
- Heating and air conditioning systems
- Fire protection systems
- Alarm and security systems
Note, however, that if the taxpayer is a noncorporate lessor of the nonresidential real property (e.g., individual or partnership), they are not able to take the Section 179 deduction on these type assets, since they are not generally allowed to take Section 179 on any leased assets.
The availability of the Section 179 deduction may also be useful for a taxpayer that is attempting to control their taxable income so it hits a target amount, perhaps to maximize their 20% flow-through deduction or limit the application of the TCJA’s new $500,000 business loss limitation. Having the use of both bonus depreciation and Section 179 provides greater flexibility than just bonus depreciation alone, since Section 179 is elected on an asset-by-asset basis, while bonus depreciation is applied on an asset-class-by-asset-class basis.