If eligible, you can use Section 179 expensing or bonusdepreciation to deduct a significant portion, or even the full cost, ofqualifying property in the year it's placed in service. Alternatively, you canspread deductions over several years using regular depreciation rules,depending on the asset's classification.

While immediate deductions can reduce your taxable income,they might not always be the best choice.

Sec. 179 and Bonus Depreciation Basics

Section 179 allows you to deduct the full cost of eligibleassets like equipment, furniture, and qualified improvement property (QIP). For2024, the annual limit is $1.22 million, with a phase-out starting at $3.05million. However, you can only use this deduction to reduce income to zero, notto create a net operating loss.

Bonus depreciation is available for qualified assets,including new and used tangible property, off-the-shelf software, and certainproductions. Bonus depreciation rates are decreasing: 80% in 2023, 60% in 2024,40% in 2025, and 20% in 2026, with potential elimination afterward unlessextended by Congress.

When to Consider Forgoing These Deductions

Selling QIP: If you claim Section 179 or bonusdepreciation on QIP and then sell the property, the gain up to the amount ofthese deductions will be taxed as ordinary income, which can be as high as 37%.Using regular depreciation, with a 15-year schedule, results in a lower taxrate on long-term gains (up to 25%).

Maximizing QBI Deduction: The Qualified BusinessIncome (QBI) deduction allows eligible business owners to deduct up to 20% oftheir QBI. However, claiming Section 179 or bonus depreciation lowers yourtaxable income, potentially reducing your QBI deduction. Since the QBI deductionis set to expire after 2025, maximizing it while available is often a smartmove.

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