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What is Depreciation?
Depreciation is an accounting method that spreads the cost of an asset over its useful life. It helps business owners recover that cost over time, which can reduce taxable income in future years. To further encourage business investment, the tax code also provides accelerated options such as bonus depreciation and the Section 179 deduction.
What is Bonus Depreciation?
Bonus depreciation is a tax incentive that allows businesses to deduct a large percentage of the cost of eligible assets in the year they are placed in service. This can reduce immediate tax liability on purchases of new or used equipment, machinery, and certain software with a useful life of 20 years or less. There is no annual dollar limit on bonus depreciation, and the deduction can exceed the business’s taxable income. The amount allowed is based on a percentage of qualifying asset costs rather than a fixed dollar cap.
What is the Section 179 Deduction?
Section 179 is an election to expense all or part of the cost of qualifying assets in the year they are placed in service. It is subject to an annual dollar limit (indexed for inflation) and generally cannot create or increase a business loss. Any unused Section 179 amount may be carried forward to future years.
When would you choose one over the other?
Bonus depreciation and Section 179 can be used together. Because Section 179 is limited by an annual dollar cap, it is typically applied first. After claiming the available Section 179 deduction, you can apply bonus depreciation to the remaining cost of eligible assets. Note: Kentucky does not conform to the federal bonus depreciation rules and caps the Section 179 deduction at a much lower amount. Bonus depreciation is generally an “all-or-nothing” election by asset class—for example, if you claim bonus depreciation on one 5-year asset, you generally must claim it on all eligible 5-year assets placed in service that year. Section 179 offers more flexibility because you can choose which assets to expense and how much to expense for each asset.
In summary, both bonus depreciation and Section 179 accelerate deductions for qualifying business assets, but they work differently: Section 179 is an elective deduction with annual limits and taxable-income restrictions, while bonus depreciation is percentage-based and can generally create or increase a loss. The most effective approach often depends on your current-year income, expected future profitability, and state rules—especially in Kentucky, which limits Section 179 and does not follow federal bonus depreciation.
This article was written by Julie Howard. Julie is an Accounting Specialist I with Baldwin CPAs. For more information on the support Baldwin CPAs can provide you, contact julie.howard@baldwincpas.com.
