If a taxpayer expects to pay lower marginal tax rates this year and high marginal tax rates in the future. To ensure better depreciation deductions for future years with high marginal tax rates, the taxpayer should pass on Sec. 179 or bonus depreciation deductions for this year. This will result in a decrease in the total tax liability.

To encourage businesses to invest in equipment and property, Section 179 expensing and bonus depreciation both offer tax incentives. Here's what makes them different:

Section 179 Expensing

1. Businesses can use Section 179 to deduct the entire cost of qualified equipment and software that were bought or financed and put into service during the tax year.
2. The amount you can deduct under Section 179 is limited on an annual basis. In 2024, the maximum is $1,160,000, with a threshold that starts at $2,890,000.
3. The same rules apply to both new and used equipment. Nonetheless, it needs to be utilized in excess of 50% for business purposes.
4. To claim Section 179 on your tax return, Form 4562 must be filed.
5. The eligibility for other deductions or credits based on profit levels may be affected by Section 179's reduction of net income.

Bonus Depreciation

1. Businesses have the option to deduct a large percentage of the purchase cost of eligible property in the year it is put into service through bonus depreciation.
2. Currently, bonus depreciation allows for a 100% depreciation deduction in the first year until 2023, but the percentage will start decreasing in 2024.
3. It relates to both new and used property (as long as it is the taxpayer's first use), and there are certain improvements to non-residential buildings that can be included.
4. Bonus depreciation is automatic, unlike Section 179. If you're not willing to take it, you have to make the choice not to take it.
5. Utilized in the aftermath of Section 179 deductions. Section 179 is applied first, and the remaining balance is then depreciated with bonus depreciation.

What are the key differences between section 179 deduction and bonus depreciation?

• With Section 179, you have more control over how much you can deduct every year, whereas bonus depreciation is a one-size-fits-all option unless you opt out.
• Section 179, unlike bonus depreciation, does not have an annual deduction limit, which makes it advantageous for larger investments.
• Section 179 needs to be elected, but bonus depreciation is automatic and can be opted out if not desired.
• Managing your tax liabilities and cash flow can be made more effective by the use of both incentives. The choice between them is contingent upon your unique business situation and financial strategy.