Section 179 depreciation was originally designed to help businesses grow by allowing them to completely write off large purchases of machinery and equipment in the first year of use. It had some quirky limitations, but if a company was profitable, it could be very beneficial.
When the Tax Cuts and Jobs Act of 2017 was passed, the rules for bonus depreciation changed dramatically. It allowed businesses to immediately write off 100% of the cost of eligible property purchased and put into service between September 2017 through the end of 2022. Due to these relaxed guidelines, Section 179 largely fell to the wayside.
2023 saw the beginning of the phase out of bonus depreciation, lowering it to 80% for 2023, followed by 20% decreases each year until it is completely phased out in 2027. This has brought Section 179 depreciation back to the forefront. It is time once again to start thinking about using it when deciding how to depreciate property. Many fixed assets qualify for Section 179. These include furniture, fixtures, computer equipment and software, machinery and equipment, and some vehicles. It can also be used on nonresidential roofs, heating, ventilation, air conditioning, fire and alarm protection systems, and certain leasehold improvements to the interior portion of a building.
There are some limitations with Section 179 depreciation that do not apply to bonus depreciation. A loss cannot be created for the company through the election to take Section 179 depreciation. Also, since it was originally set up for smaller businesses, the deduction limit in 2023 was $1.16 million with a maximum asset spending phaseout at $2.89 million. These limits have gone up slightly in 2024, to $1.22 and $3.05 million respectively. In addition, it is not allowed for non-grantor trusts.
There are no big changes on the horizon for Section 179 depreciation. It should continue to play a big part in fixed asset purchase planning for the foreseeable future.
