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) 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

The total amount you can elect to deduct under section 179 for most property placed in service in tax years beginning in 2016 generally cannot be more than $500,000. If you acquire and place in service more than one item of qualifying property during the year, you can allocate the section 179 deduction among the items in any way, as long as the total deduction is not more than $500,000. You do not have to claim the full $500,000.

Since you can deduct the entire cost (up to certain limits) in the first year the property is purchased and placed in service, the deduction is referred to as the first-year expensing deduction. It is also referred to as the Section 179 deduction, a reference to the Internal Revenue Code (IRC) section.

UPDATE FOR 2015:

The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) was passed by both the House and Senate and signed into law on 12/18/2015. This bill expanded the Section 179 deduction limit to $500,000.

Until further notice the Section 179 deduction is permanent at the $500,000 level.

Section 179 Deduction Phase-out:

If the cost of your qualifying section 179 property placed in service in a year is more than $2,000,000, you generally must reduce the Section 179 deduction limit (but not below zero) dollar-for-dollar by the amount of the cost that exceeds $2,000,000.

For example, if you place in service machinery costing $2,100,000, the $500,000 deduction limit is reduced by $100,000 to $400,000.

If the cost of your section 179 property placed in service during 2015 is $2,500,000 or more, you cannot take a section 179 deduction because the $500,000 deduction limit would be completely phased out.

The Section 179 cap will be indexed to inflation in $10,000 increments in future years.

Bonus Depreciation:

Fifty percent (50%) Bonus Depreciation will be extended through 2019. Businesses of all sizes will be able to depreciate 50 percent of the cost of equipment acquired and put in service during 2015, 2016 and 2017.

Bonus Depreciation Phase Down in 2018 and 2019:

Bonus depreciation will phase down to 40 percent in 2018 and 30 percent in 2019.

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 first-year 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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