There’s a line in the Benicio del Toro movie Sicario where he says: “You're asking me how a watch works. For now, just keep an eye on the time.” In the movie, they are approaching a situation where too much analysis could be fatal . . . they have to keep an eye on the big picture.
In small business country, there is limited space for indecision, and there’s a lot of disinformation out there causing unnecessary analysis about depreciation. Websites touting the advantages of Section 179 accelerated depreciation bristle with calculators and official-looking images of Washington D.C. and IRS stationery. You start to believe there’s a lot of “official IRS math” involved.
Bonus Depreciation Eclipses the Benefit of Section 179
But wait! The easiest path to what your customers want is simple and right in front of you: If your customers want a tax break when they finance equipment or software using an Equipment Finance Agreement or a $1 Buyout lease, tell them they can deduct the whole darn thing on their federal tax return using Bonus Depreciation, a law that went into effect back in 2017. Yup, this deduction has no dollar limit.
Section 179 and Bonus Depreciation Difference
Some states don’t conform to the IRS limits and regulations on Section 179 deductions and bonus depreciation. Your tax person knows how your state treats these deductions and can plan your immediate and future deductions. There are some equipment restrictions, but none of which applies to the assets GreatAmerica is involved with. Bonus Depreciation will phase out beginning in 2023, where the deduction will be 80%, followed by 60% in 2024, 40% in 2025, etc.
In general, Section 179 still has applicability for some small businesses but is mostly for those with unique tax planning needs. Bonus Depreciation may generate a taxable loss (NOL), however, some taxpayers may not want to generate an NOL for planning purposes and instead have zero taxable income. In this case they don’t use Bonus Depreciation and take Section 179 to get their taxable income at or near zero. To my point, Section 179 may still be a benefit for taxpayers with very specific tax planning needs.
Why the Section 179 Fascination?
It’s a watering hole we keep returning to out of habit, and is still a checkbox on even the cheapest $30 dollar accounting software anyone can get online. About this time of year—for many of the past ten years—we awaited Congress to decide on what that expensing limit was going to be. The news junkie in us loved the anticipation. It became habitual. Was it going to be $25,000? $100,000? $500,000? There are also whole websites and resources dedicated to this, and by golly they have a great interest in keeping the visitor traffic up on their sites!
NOTE: This article is for informational purposes only. It is not intended as, nor does it constitute, accounting or tax advice. You should contact your own accounting and tax advisors to determine how Bonus Depreciation or Section 179 apply to your business and your transactions with customers.
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- section 179