Just a few days ago, Congress passed a huge piece of tax legislation, the “One Big Beautiful Bill,” that reinstates 100% bonus depreciation! If you are a small business owner, this can add up to some beautiful savings if you use the right tax strategies when you buy qualifying business property like machines, equipment, vehicles and some types of improvements, you can take a 100% deduction for that purchase – yes free and clear – in year one as you put it in service. It means money in your pocket now instead of waiting years crying over getting your purchase cost back through depreciation.
You may be thinking, “Why do we need bonus depreciation as long as we have the Section 179 deduction?” It’s because Section 179 rules have a lot of limitations that don’t apply to bonus deprecation. They both help you write off business purchases fast, but they work differently. And understanding how to use them together could save you thousands on your tax bill. Let’s break it down.
100% Bonus Depreciation – What’s Back and Why It Matters
Bonus depreciation has been slowly phasing out over the last few years, dropping from 100%, to 80% in 2023, to 60% in 2024, and so on. But now with the new law, we have 100% bonus depreciation – for qualified purchases after 1/19/2025.
Here’s why that is so important. First, you get a first-year write-off. You can deduct 100% of qualifying new or used property you place in service in a given year. Second, there are no spending limits. Unlike Section 179, there is no annual limit on the write-off. Whether you acquire $20,000 dollars’ worth of equipment or $2 million dollars’ worth of equipment, bonus depreciation will cover it. Third, it includes a wider range of property. Qualified property includes anything from equipment to heavy vehicles, like trucks over 6,000 lbs, and some improvements to your buildings.
Let’s say you buy a dump truck for $120,000. With 100% bonus depreciation, you would expense the entire $120,000 this year. No waiting.
Bonus Depreciation vs Section 179 – Key Differences That Matter
Both bonus depreciation and Section 179 allow you to expense the cost of business property quickly; however, they work differently.
Bonus Depreciation Works Better for Rental Property
Most rental properties are considered passive activities, and Section 179 does not help with passive activities. Without Section 179, these taxpayers are stuck depreciating property over many years – unless bonus depreciation comes to the rescue! Bonus depreciation can apply to appliances, flooring, and other improvements to the interior of the building. Therefore, landlords can now take meaningful first year tax deductions on major upgrades.
Bonus Depreciation Can Offset Other Income
Section 179 also has a big limit. Section 179 can only offset business income. In corporations and partnerships, it’s even worse – Section 179 can only offset business income from the same business. So it does not create a loss to offset other income, such as interest, dividends, or retirement income.
For example, assume you had a high-income year from extra retirement income or a bonus at your spouse’s job. Your S corporation invests in a new piece of equipment and claims bonus depreciation, creating a loss that decreases the total amount of taxable income in your household. That’s real money saved.
Bonus Depreciation Comes with No Ugly Surprises
Under Section 179, the IRS has recapture provisions if you don’t keep using the property mostly for business. That can be a big deal for vehicles, for example. This means you may be required to pay taxes on a portion of the write-off you took even if you don’t sell the vehicle! Bonus depreciation does not come with recapture traps like Section 179.
Simpler Reporting
Because the rules for bonus depreciation are simpler than the rules for Section 179, the reporting for bonus depreciation is also simpler, especially for partnerships and S Corps. Section 179 depreciation must be stated separately on K-1s, both when the asset is purchased and when it is sold or thrown away. Bonus depreciation does not need to be stated separately on K-1s. This means cleaner tax reporting for partnerships and S Corps, as well as less headache at tax time.
Using Bonus Depreciation and Section 179 Together
This is the key. It is not about selecting one or the other. Smart tax planning incorporates both. Bonus depreciation is very powerful, wiping out income without limits. But if you find yourself wiping out too much income with bonus depreciation, it may may sense to save part of the deduction for later if you’ll be in a higher tax bracket. You can use Section 179 to take a controlled amount of deduction where it makes sense.
For example, a business places in service $50,000 of building improvements and $90,000 of equipment. Instead of taking full bonus and dropping into a lower tax bracket, the business takes bonus on the building improvements and uses Section 179 to deduct exactly the amount needed to reach the bottom of their normal tax bracket — optimizing taxable income and leaving depreciation deductions for future years.
What This Means For You
Now that 100% bonus depreciation is back on the table, small business owners have a significant resource to minimize tax expense and enhance cash flow. But to do it right, you need to plan. Understand what qualifies. Time your purchase decisions to maximize deductions. Consider using bonus depreciation and Section 179 together to put you into the best position.
This is especially relevant if you are in a high-income year and want to offset other income, own rental property and plan on improvements to it, or are planning to invest in equipment or vehicles.
In Conclusion
Before beginning any large equipment, vehicle, or property purchase, please speak with your CPA. The right strategy could save you thousands of dollars and help you avoid tax surprises later. If you own rental properties or expect a significant year for household income, you need to look at your tax plan now. Knowing how much bonus depreciation you can take can unlock tax planning opportunities to minimize your tax for the long term.