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The IRS encourages businesses to invest in fixed assets by allowing deductions for significant asset purchases and improvements in the year when they are put into use. These deductions could be classified into two primary categories: Section 179 and bonus depreciation. Each deduction has its unique advantages and disadvantages underscoring the importance of comprehending your choices before applying them to assets acquired within a tax year. Dimov Tax & CPA Services is ready to assist you during the relevant processes to accelerate deductions and optimize tax benefits, particularly regarding assets like vehicles, machinery and equipment.
Bonus Depreciation
Bonus depreciation is a tax incentive that allows businesses to immediately deduct a substantial portion of the cost of qualifying assets in the year they are placed in service. The legal reference for bonus depreciation can be found in the United States Internal Revenue Code, under Section 168(k).
This section outlines the provisions related to bonus depreciation including the eligibility criteria, applicable percentages and other relevant details. The depreciation method was introduced as part of various tax legislation to stimulate business investment and economic growth. One significant aspect of bonus depreciation is its ability to enable businesses to claim a higher percentage of depreciation in the first year, providing immediate tax relief.
Qualifying Assets
Bonus depreciation typically applies to tangible personal property with a recovery period of 20 years or less. For instance, machinery, equipment, furniture and certain types of vehicles could be counted among the mentioned properties. In addition, it may include certain qualified improvement properties which makes it particularly advantageous for businesses investing in upgrades to their facilities.
Benefits of Bonus Depreciation
Limitations and Considerations
While bonus depreciation offers significant advantages, it would be essential for businesses to consider certain limitations and factors:
Section 179 Depreciation
Section 179 of the Internal Revenue Code allows businesses to deduct the full purchase price of qualifying equipment and software purchased or financed during the tax year. On the contrary to bonus depreciation which applies to new assets, Section 179 of the IRC could also be applied to both new and used assets. This feature provides a versatile tax planning tool for businesses of all sizes.
Qualifying Assets
Section 179 depreciation applies to tangible personal property used in the course of business, including machinery, equipment, vehicles, computers, software and certain types of real property improvements. This provision is particularly beneficial for small and medium sized businesses which are looking to invest in essential assets while maximizing tax deductions.
Benefits of Section 179 Depreciation
Limitations and Considerations
While Section 179 depreciation offers significant benefits, businesses should be mindful of certain limitations and considerations:
Section 179 and Bonus Depreciation: Essentials
Section 179 and bonus depreciation could be used at the same time when the business is near the deduction limits specified in Section 179 and the business has additional fixed assets that qualify for accelerated depreciation. The benefit lies in the ability to utilize additional depreciation deductions exceeding the limits defined in Section 179. Ensuring compliance with regulations specific to different states is important since many states docoupled from IRS guidelines concerning these deductions. When both deductions are applied federally, determining the portion of federal depreciation to be included for state tax return purposes may become challenging.
Conclusion
Bonus depreciation and Section 179 depreciation are valuable tools that businesses can leverage to optimize tax benefits. Businesses might make informed decisions to maximize deductions, improve cash flow and drive long term growth by understanding these depreciation methods and their implications for asset investment and tax planning. Consulting with tax professionals and staying abreast of changes in tax legislation are crucial for navigating the complexities of depreciation and capital asset management in today’s dynamic business environment and Dimov Tax is ready to provide professional consultation during the entire process.
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Dimov Tax is rated 5 stars on all major review platforms including Google, Yelp, Facebook, Angie’s List, Better Business Bureau, TaxBuzz, Thumbtack, Upwork, Bark, and much more.