Key insights
- Effective tax planning requires continuous consultation, particularly around Section 179 and bonus depreciation, which have undergone significant changes designed to accelerate deductions for business asset purchases.
- Starting with tax years beginning on or after January 1, 2025, Section 179 enhancements include a higher deduction limit and an increased threshold for total asset purchases that trigger phase-out.
- Bonus depreciation returns to a full 100% for assets placed in service AND acquired after January 19, 2025.
Use enhanced depreciation benefits to reduce your tax liabilities.
Tax planning should be an ongoing strategy - not just a year-end task. Businesses benefit from continuous guidance to identify tax savings opportunities, such as leveraging Section 179 alongside bonus depreciation to increase or, in some cases, strategically manage depreciation deductions.
The newly enacted One Big Beautiful Bill Act (OBBBA) increased the Section 179 limit and introduced a higher phase-out threshold based on total qualified fixed asset purchases. Additionally, bonus depreciation has been permanently set at 100%, offering a strategic tool for tax planning.
Understanding the differences between Section 179 and bonus depreciation can deliver powerful benefits for your business. Each offers distinct advantages and has different eligibility criteria, especially when planning major equipment or property purchases. Being knowledgeable on how each provision works is important to achieving your tax goals.
What is a Section 179 depreciation deduction?
Internal Revenue Code Section 179 allows taxpayers to deduct the cost of qualifying property as an expense in the year the property is first placed into service. This deduction applies to tangible property such as machinery, equipment, and software used in a trade or business.
It also includes qualified real property like improvements to roofs, HVAC systems, fire alarms, security systems, and other leasehold improvements to nonresidential real estate.
This deduction has been around for many years. To qualify:
- The property must be acquired for use in an active trade or business
- The asset must be used more than 50% for business purposes
Property used solely to produce income (e.g., rental or investment property) generally does not qualify.
Updates under the OBBBA:
- The Section 179 deduction limit increased from $1 million to $2.5 million. The date of acquisition does not matter.
- The phase-out threshold tied to total qualified purchases for the tax year was also raised significantly, moving from $2.5 million to $4 million, with a complete phase-out at $6.5 million.
- Both changes are effective for assets placed in service in tax years beginning on or after January 1, 2025.
Learn more about significant changes within the new tax law and connect with CLA to review your tax strategy and model potential impacts.
What is bonus depreciation?
Bonus depreciation provides a valuable tax incentive by allowing businesses to claim an additional first-year depreciation deduction on eligible assets placed in service. To qualify, the assets must be used in a trade or business and have a recovery period of 20 years or less under the tax law.
Under OBBBA, 100% bonus depreciation for qualifying property is reinstated and made permanent.
How to qualify for 100% bonus depreciation under OBBBA
To qualify for the 100% bonus depreciation under the OBBBA, two timing conditions must be met: the property must be both acquired and placed in service after January 19, 2025. Meeting just one of these criteria isn’t sufficient – it is essential that both the acquisition date and the placed in-service date fall after January 19, 2025.
An asset is considered “placed in service” the date the asset is ready and available for use. It is a familiar concept for fixed assets and depreciation.
But, the acquisition date often adds a layer of complexity. It’s not always as simple as the day you signed a check. You likely will need to dig into construction contracts, general contractor agreements, lease agreements, and even change orders. For purchases, you’ll want to review purchase agreements and delivery terms.
The key question is: When did you legally commit to acquire the asset, or if a contract is signed, when did the contract become legally binding? While it’s a simple question, it’s not a simple answer.
If the acquisition date falls before January 19, 2025, the asset doesn’t qualify for 100% bonus depreciation. Instead, it defaults to rates under TCJA, which means you’re looking at 40% bonus depreciation, if the asset is placed in service in 2025.
Taxpayers should carefully analyze both the acquisition and placed-in-service dates. That timing could make a big difference in how much you can deduct upfront.
Section 179 and bonus depreciation examples
Each deduction offers meaningful advantages on its own, and when strategically combined, they can deliver even greater value to taxpayers.
| Deduction Type | Business Example | Assets Purchased | Cost | Deduction Applied | Year 1 Deduction |
|---|---|---|---|---|---|
| Section 179 | Boutique marketing agency | Video production suite (computers, cameras) | $250,000 | Full deduction under Section 179 | $250,000 |
| Bonus Depreciation | Car Dealership | Furniture, Fixtures and Equipment | $7,000,000 | 100% bonus depreciation | $7,000,000 |
| Combined Strategy | Growing dental practice | Imaging equipment + leasehold improvements (lighting, flooring) + roof replacement | $1,000,000 | Section 179 on $250K roof + 100% bonus on $750K improvements and equipment | $1,000,000 |
Notes
- Section 179: The total of all purchases for the year is well below the $4 million phase-out threshold. The equipment qualifies as tangible personal property used in business. Therefore, Section 179 can be elected on these assets.
- Bonus Depreciation: The company exceeded its Section 179 limit on fixed asset purchases, so bonus depreciation helps front-load deductions on qualifying assets.
- Combined Strategy: Taking both increases the deduction.
As you can see in example 1, the same result would have been obtained if bonus depreciation was claimed. In example 2, Section 179 is not an option because the fixed asset purchase limit of $6.5 million has been exceeded. Therefore, only bonus depreciation can be taken. In example 3, both strategies must be used to obtain the largest tax deduction.
Are there any differences between Section 179 and bonus depreciation?
While the result of taking Section 179 or bonus depreciation may appear the same, there are some key differences to consider:
- State conformity should be considered as some states may follow federal Section 179 and/or bonus depreciation, or neither.
- Trusts cannot be allocated Section 179 deductions.
- Bonus depreciation can be deducted in an unlimited amount and can create a net operating loss that can be carried forward only for use in future years.
- Section 179 can only be deducted to the extent of business income. Any limitation due to business income carries forward only, as Section 179 expense.
- A net operating loss carryforward versus a Section 179 carryforward are different. Depending on the taxpayer’s situation, one may be preferable to the other.
- Acquisition date does not matter for Section 179 expense. Therefore, this may be a way to expense assets acquired before January 20, 2025 but placed in service after January 1, 2025.
How CLA can help with strategic tax planning
At CLA, strategic tax planning is more than just reducing liabilities — it’s about unlocking tailored opportunities that fuel your growth. Our approach is designed to help you increase cash flow, align tax strategies with your broader financial goals, and stay ahead of legislative changes that could impact your bottom line.
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