Section 179 and Depreciation Cash Impact

How Section 179 works

Buy a \$50,000 piece of qualifying equipment (computers, vehicles over 6,000 lbs GVWR, machinery, off-the-shelf software). Without Section 179, you'd depreciate it over 5 years (\$10K/year). With Section 179, you expense the full \$50K in year 1.

At a 25% effective tax rate, that's \$12,500 of tax saved this year — cash that stays in the business — versus only \$2,500 in year 1 under straight-line depreciation. The total deduction is the same; the timing is dramatically better.

Limits and bonus depreciation

2024 Section 179 cap: \$1,160,000 deduction with phase-out beginning at \$2.89M of total purchases. Cannot create a tax loss (limited to taxable business income). Vehicles under 6,000 lbs are limited (\$12,200 first-year cap for passenger autos).

Bonus depreciation (Section 168(k)) supplements Section 179 — was 100% in 2017-2022, phasing down: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, 0% in 2027 (subject to legislation). A small business buying \$2M of equipment uses Section 179 first to its limit, then bonus depreciation, then straight-line for the remainder.

Coordinating Section 179 and bonus depreciation

Section 179 lets you immediately expense up to $1.16M of qualifying equipment purchases (2023 limit, indexed annually) instead of depreciating over the asset's useful life. The deduction phases out dollar-for-dollar above $2.89M of total purchases and is limited to your taxable income — you can't use Section 179 to create a net operating loss.

Bonus depreciation under Section 168(k) was 100% through 2022 and is phasing down 20% per year (80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, 0% in 2027 unless extended). Unlike Section 179, bonus depreciation can create a loss and is automatic unless you elect out. For purchases that exceed Section 179 limits, bonus depreciation picks up the excess.

Coordinate the timing carefully. Accelerating equipment purchases into a high-income year produces a large deduction in that year; deferring them into a year when other deductions are limited may waste them. Talk to a tax preparer before December 31 if you're considering meaningful equipment purchases; the tax savings can be substantial and the math is sensitive to the year-by-year picture of your business.

Cost segregation studies on real estate purchases or major leasehold improvements often unlock substantial accelerated depreciation by reclassifying portions of the building (carpets, fixtures, certain electrical) to shorter-life asset classes. The studies typically cost $5-15k and produce $50-200k of accelerated deductions for buildings in the $1-5M range. Worth considering on any meaningful real-estate transaction.