What is First-Year Expensing (Section 179) and Bonus Depreciation?

Internal Revenue Code Section 179 permits you to write-off the entire cost of qualified property (up to certain limits), such as equipment, furniture, fixtures, and vehicles, the first year it is purchased and placed in service instead of taking depreciation deductions over the property's recovery period, which may be several years. Land is not depreciable, since it does not ware out and has no determinable usefule life.

Placed in service means, the property purchased was BOTH ready AND available for a specific use in a tax year.

For example, if you pruchased a machine December 30, 2016, but it was delivered and ready to be used in January 2017, you would claim the section 179 deduction in 2017, the year the machine was both ready and available in 2017. However, had you received delivery of the machine in December 2016 and it was was ready for use at that time, but you did not start using it until January 2017, you may claim the section 179 deduction in 2016 because the machine was both ready and available for use in December 2016.

2017 Maximum Section 179 Deduction limit - $510,000

For tax year 2017, the maximum amount you can elect to deduct under section 179 for most property placed in service is $510,000. If you acquire and place in service more than one item of qualifying property during the year, you can allocate the deduction among the various items in any way you want, as long as the total deduction is not more than $510,000. Keep in mind, you do not have to claim the section 179 deduction.

2017 Maximum Purcahse Limit - $2,030,000

For 2017, the $510,000 maximum deduction is reduced dollar-for-dollar for every dollar of qualifying property purchased that exceeds $2,030,000. For example, if you purchased $2,130,000 worth of qualifying property during 2017, you would reduce the $510,000 maximum deduction by $100,000 to $410,000 ($2,130,000 minus $2,030,000).

Bonus Depreciation

Although Section 179 (first-year expensing deduction) applies to both new and used qualified property placed in service, bonus derpreciation only applies to new property placed in service.

Bonus depreciation of 50% is allowed for vehicles placed in service in 2012 that were purchased new and used over 50% for business. The bonus depreciation ceiling for 2012 is $11,160 for cars (the regular annual ceiling of $3,160 plus $8,000 bonus depreciation) and $11,360 for light trucks, vans, and SUVs, weight-rated 6,000 pounds or less (the regular annual ceiling of $3,360 plus $8,000 bonus depreciation). These ceilings must be reduced by personal use.

Section 179 (first-year expensing) is taken into account before claiming bonus depreciation.

Bonus Depreciation vs First-Year Expensing (the Section 179 Deduction)

Don't confuse bonus depreciation with the first-year expensing deduction (also referred to as the Section 179 deduction). They are two different deductions. Both may be claimed the first year qualified property is placed in service, provided the property is used more than 50% for business.

Here are the differences:

  • Bonus depreciation may only be claimed for new depreciable property placed in service for business use.
  • The Section 179 deduction may be claimed for both new and used property purchased and placed in service in the same year. For example, if you used your computer for personal use in 2014, then placed it into service in your business in 2015, you may not claim the Section 179 deduction.
  • The Section 179 deduction has an annual limit of $500,000 for 2015. The $500,000 limit will remain permanent unless Congress changes it some time in the future.
  • The Section 179 deduction is figured before claiming any bonus depreciation.
  • Bonus depreciation is limited to 50% of the basis that remains after subtracting the Section 179 deduction. For example, if the cost of a machine was $510,000, bonus depreciation would be limited to 50% x $10,000, or $5,000 ($510, 000 minus the Section 179 deduction of $500,000 x 50% of the remaining basis of $10,000)

Where to claim the Section 179 deduction and bonus depreciation

The Section 179 deduction and bonus depreciation are both claimed on Form 4562. Bonus depreciation is claimed in Part II, line 14. It is called "Special depreciation allowance for qualified property".

Deduction Order for Section 179 deduction, Bonus Depreciation, and Regular MACRS Depreciatiion

Follow this deduction order:

  • First, figure your Section 179 deduction (first-year expensing deduction).
  • Subtract the amount of the Section 179 deduction from the original cost of the property to find the basis available for bonus depreciation.
  • Figure bonus depreciation by multiplying the basis available for bonus depreciation by 50%.
  • Use the basis remaining after first subtracting both the Section 179 deduction and Bonus Depreciation to figure regular MACRS depreciation..

Example:

During tax year 2015 you purchase and place in service new equipment costing $510,000.

The computation for first-year expensing (Section 179), 50% bonus depreciation, and regular MACRS depreciation follows:

Depreciation Computation
  Depreciation Basis
Cost of Property   $510,000
Section 179 deduction (maximum allowed) $500,000 (500,000)
Basis Available for Bonus Depreciation   10,000
Bonus Depreciation (50% x $10,000) 5,000 (5,000)
Basis Available for MACRS   $5,000
MACRS depreciation (20% x $5,000) - double declining balance, half-year convention 1,000 (1,000)
Total Depreciation $506,000  
Adjusted Basis   $4,000

Property Used Less than 100% for Business

If you use depreciable business property less than 100% for business, you must multiply any depreciation allowance by the business-use percentage to determine the amount of depreciation you may claim.

For example, if you used your car 80% for business and 20% for personal use and you elected to use the actual expense method for claiming car expenses (as opposed to the standard mileage rate), you must multiply the depreciation allowance shown in the the depreciation table by 80% to find your deductible depreciation amount.

  • Keep in mind, the depreciation tables assume 100% business use.

Recapture of Special Depreciation Allowance:

When you dispose of property for which you claimed a special depreciation allowance (e.g., Section 179, bonus depreciation), any gain on the disposition is generally recaptured (included in income) as ordinary income up to the amount of the special depreciation allowance previously claimed.

  • Keeping property records, including all depreciation claimed on each piece of property is critical for proper tax reporting when disposing of the property.

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