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How Bonus Depreciation Can Help Your Small Business

Article cover image with the title “How Bonus Depreciation Can Help Your Small Business” on a lavender background. On the left side, there's a photo of stacked coins decreasing in height from left to right, with a chalk-drawn arrow pointing downward, symbolizing depreciation. Curved lines in green and purple decorate the background. The website www.overmanbookkeeping.cpa is written vertically along the edge.

In our last article, we discussed the importance of having a capitalization policy. A capitalization policy determines which assets are recorded on your balance sheet and depreciated over time, rather than expensed immediately. This method allows you to write off the cost of significant assets gradually, reflecting their useful life in your financial records.


When it comes to tax returns, different methods are used to write off depreciable assets, and these may also be used for your financial records. For the purposes of this article, we’re focusing on tangible personal property (e.g., equipment, furniture, vehicles)—not real property.


The primary method of depreciation for tax returns is the Modified Accelerated Cost Recovery System (MACRS). This method has been required for tangible personal property placed in service after 1986. The IRS assigns different recovery periods or "lives" for how this depreciation is calculated. However, there are two key exceptions to the MACRS system, and understanding them can be especially beneficial for small business owners.



1. Bonus Depreciation

Bonus depreciation is a special first-year depreciation allowance introduced by the IRS for certain qualifying new and used property placed in service between September 28, 2017, and January 1, 2027.

  • For property placed in service before 2023, the allowance was 100%, meaning businesses could write off the full purchase cost for tax purposes.

  • Starting in 2023, a phased reduction began: 2024 allows for 60%, 2025 for 40%, 2026 for 20%, and then the allowance will be phased out entirely in 2027.


Any remaining value of the asset that isn’t expensed through bonus depreciation is then depreciated using the standard MACRS method.


To qualify for bonus depreciation:

  • The property must be used in a trade or business or for the production of income.

  • It must be classified as “Qualified Property.”


Qualified property generally includes:

  • MACRS property with a recovery period of 20 years or less

  • Certain computer software

  • Certain specialty property


This includes most office equipment, furniture, land improvements, and just about anything you would use in an office-based business —but not real estate. Bonus depreciation is elected annually using IRS Form 4562.



2. Section 179 Deduction

The Section 179 deduction (referring to the IRS Code Section 179) is another method that allows businesses to expense qualifying property up front. While similar in intent to bonus depreciation, there are important differences, including but not limited to the following:

  • Business Use Requirement: Section 179 only applies to property used in an active trade or business. Rental properties typically do not qualify.

  • Vehicle Limits: There are specific limits on the amount that can be expensed for vehicles.

  • Expense Limits:

    • A dollar cap: The total cost of property that can be expensed is capped at $1,000,000 of aggregate cost per taxable year.

    • A taxable income limit: The deduction cannot exceed the business's aggregate amount of taxable income. For example, if your Schedule C or S Corporation has a zero or negative profit, you cannot use Section 179 to create a loss. However, a salary from active business operations does count toward this income limit.



Final Thoughts

Both bonus depreciation and Section 179 offer valuable tax planning opportunities for small business owners. Choosing the right method—or a combination of both—can significantly impact your financial strategy. But it’s critical to work with a qualified tax preparer. Simple DIY tax software often doesn’t account for these nuanced rules and limitations.


Bonus depreciation is also a timely topic in the news, with potential federal legislation that may impact how long this benefit is available. As of this writing, no changes have been finalized.


Have questions about how bonus depreciation might apply to your business? Contact Overman Bookkeeping, PC today for trusted guidance on tax strategies, accounting, and bookkeeping support tailored to your small business.

 
 
 
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