Planning Ahead: Navigating Sec. 179 Expensing vs. Bonus Depreciation

Understanding how to maximize tax savings through smart fixed asset strategies

As bonus depreciation continues its gradual phaseout, tax practitioners will need to revisit Section 179 expensing as a powerful tool for managing fixed asset deductions. Both Sec. 179 and bonus depreciation offer substantial tax benefits, but the key to optimizing those benefits lies in understanding their differences and using them strategically.

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Bonus Depreciation: A Changing Landscape

The 100% bonus depreciation provision—introduced under the 2017 Tax Cuts and Jobs Act—expired for most property placed in service after December 31, 2022. The bonus depreciation schedule is phasing down as follows:

• 2024: 60%

• 2025: 40%

• 2026: 20%

• Post-2026: Phased out entirely

As bonus depreciation phases out, assets will increasingly be subject to a mix of bonus and MACRS (Modified Accelerated Cost Recovery System) depreciation. Practitioners should prioritize accurate asset classification and may consider cost segregation studies to allocate shorter lives to building components and maximize depreciation.

Qualified Improvement Property (QIP)

QIP includes taxpayer-made interior improvements to nonresidential real property made after the building’s original in-service date. It excludes building enlargements, elevators, escalators, and internal structural frameworks.

QIP qualifies for both bonus depreciation and Sec. 179 expensing, but note:

• Land improvements qualify only for bonus depreciation

• Sec. 179 can be selectively applied asset-by-asset, allowing for more control

• Using Sec. 179 for longer-lived assets like QIP preserves bonus depreciation for shorter-lived assets

• Both Sec. 179 and bonus depreciation on QIP are subject to Sec. 1245 ordinary income recapture upon sale

Practitioners should also be aware that bonus depreciation must be applied uniformly across asset classes, which opens planning opportunities to mitigate Sec. 461(l) excess business loss limitations. Electing out of bonus depreciation on certain classes can help avoid creating NOLs that are limited in their deductibility.

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Section 179 Expensing: Regaining Importance

For 2024, the maximum Sec. 179 deduction is $1,220,000, with phaseout beginning at $3,050,000 in qualifying purchases. Limits adjust annually for inflation.

Sec. 179 allows immediate expensing of qualified property, including:

• QIP

• Certain improvements to nonresidential buildings (e.g., roofs, HVAC systems, security, fire protection)

However, unlike bonus depreciation:

• Sec. 179 cannot create a loss—it’s limited to taxable business income

• Unused deductions can be carried forward

• Individual income limitations include wages, tips, and self-employment income

This makes Sec. 179 expensing particularly strategic when bonus depreciation is either unavailable or inadvisable due to income constraints.

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Special Planning Considerations

Trusts and Estates

Sec. 179 generally does not apply to trusts or estates, nor can they deduct their share of Sec. 179 allocations from partnerships or S corps. However, the underlying basis becomes eligible for MACRS or bonus depreciation, which may yield better timing benefits.

Lessors

Noncorporate lessors face strict criteria under Sec. 179(d)(5) to qualify for deductions. Most fail to meet the tests, especially if they don’t manufacture the property or can’t meet the income-to-expense ratio. In these cases, bonus depreciation is often the better route.

Controlled Groups

Entities within a Sec. 179 controlled group (defined under Sec. 1563 but with a 50% ownership test) are treated as one taxpayer for deduction limits. Practitioners must evaluate all group members together to allocate Sec. 179 expensing for maximum impact.

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Strategic Comparisons: Which Deduction Works Best?

With bonus depreciation declining, Sec. 179 is becoming a more prominent method for achieving upfront deductions. However, the choice isn’t always clear-cut. Key differences to weigh include:

A thoughtful combination of both methods—matched to asset type, holding period, and income level—can deliver the most tax-efficient outcome.

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Final Thoughts

By proactively analyzing each client’s situation and leveraging these provisions wisely, Lyntax Group can deliver substantial value and unlock powerful tax savings for your business.