Which is Better-Section 179 Deduction or 100% Bonus Depreciation? It depends!

Section 179 Rules for 2010 & 2011

For most new or used non-real property assets purchased, the Section 179 deduction limit for 2010 and 2011 is $500,000 with the limit reduced dollar for dollar (but not below zero) by the cost of qualifying property over $2 million.  The deduction for qualified real property is limited to $250,000.  Deductible Section 179 is also limited to the taxpayer’s business taxable income.  Vehicles are generally limited to $8,000 in addition to regularly allowed first year depreciation.

Qualified real property includes the following:

  • Qualified Leasehold Improvement Property – generally improvements to nonresidential building’s interior made pursuant to a lease.
  • Qualified Restaurant Property – generally buildings and improvements if over 50% of the building’s square footage is devoted to the preparation and consumption of meals.
  • Qualified Retail Improvement Property – generally improvements to a nonresidential building’s interior areas that are open to the general public for a building used in a retail business selling tangible personal property to the general public.

100% Bonus Depreciation Rules for 2010 & 2011

Most qualifying new assets that are acquired and placed in service after 9/8/2010 and before 2012 (2013 for certain long-production property and aircraft) can be written off 100%.  Vehicles are generally limited to $8,000 in addition to regularly allowed first year depreciation.

Which is Better?

If both the Section 179 deduction and 100% bonus depreciation are available there are some considerations to keep in mind:

  • Assets expensed under Section 179 are not counted toward determination of whether nor not the mid-quarter convention applies but basis deducted as bonus depreciation is.
  • Neither bonus depreciation nor Section 179 requires an alternative minimum tax adjustment.
  • Section 179 applies to new or used assets while only new assets qualify for bonus.
  • Qualified leasehold improvement property, but not the other two types, qualifies for bonus unless they also meet the requirements for qualified leasehold improvements.
  • Bonus depreciation must be claimed or elected out of by class.  Section 179 is elected on an asset by asset basis and can be used to expense less than the full amount of the asset’s basis.
  • Bonus depreciation is not limited by taxable income and can be used to create an NOL that can be carried back and perhaps used immediately.
  • Although most Section 179 taken in excess of taxable income can be carried forward indefinitely, Section 179 claimed on qualified real property cannot be carried past the 2011 tax year.
  • The asset must be used over 50% of the time for business to qualify for Section 179.  If the usage later falls below 50% business usage the Section 179 must be recaptured.  Except in the case of listed property the 50% business usage is not a requirement for bonus depreciation.
  • For Ohio taxpayers, Section 179 over $25,000 and all bonus depreciation must be taken over 6 years.  Many other states have similar limitations.