In our last blog post, How to Save on Your Farm Taxes by Knowing What Vehicles Are Eligible for Section 179, we talked about how Section 179 can save farmers a lot of money on their expensive equipment. Taking advantage of this part of the U.S. Tax Code can result in tens (if not hundreds) of thousands of dollars being available to help ag businesses grow or just feed their own families better!
However, like everything else in life, Section 179 has its limits.
Fortunately, the IRS has also included a feature called “bonus depreciation.” It works along with Section 179, but it’s not the same. In this post, we’ll explore Section 179 vs Bonus Depreciation.
Section 179 vs Bonus Depreciation
Section 179 allows small and medium-sized businesses (including agriculture operations) to deduct the costs of vehicles, software, and other equipment they use in the course of running their companies. (As you’ll see in a moment, it isn’t really intended for large corporations.) Farmers can realize especially significant savings at tax time because the costs associated with the specialized equipment they use can be massive.
Because of how expensive farm equipment (and all the other things it takes to run a farm) can be, in some years it is easy for farmers to reach the limits of what Section 179 is designed to do. After a certain amount, what you are allowed to deduct begins to decrease.
Bonus depreciation is the part of Section 179 of the U.S. Tax Code that goes into effect when the maximum allowable deductions under Section 179 have been reached.
Limitations on Section 179
According to the website Section179.org, (a very useful resource in understanding this valuable tax code that can go into much more detail than a single blog post):
“Section 179 does come with limits – there are caps to the total amount written off ($1,050,000 for 2021), and limits to the total amount of the equipment purchased ($2,620,000 in 2021). The deduction begins to phase out on a dollar-for-dollar basis after $2,620,000 is spent by a given business (thus, the entire deduction goes away once $3,670,000 in purchases is reached), so this makes it a true small and medium-sized business deduction.”
How Bonus Depreciation Works
As we said above, bonus depreciation steps in where Section 179 ends. When it comes time to file their taxes, a business that qualifies will typically deduct whatever they can under Section 179. It is usually determined by a fixed dollar amount. After the limits mentioned above have been reached, bonus depreciation can then be applied as a percentage of the cost.
The rules governing bonus depreciation can change from year to year. In the past, the IRS only allowed up to 50% of an item’s cost to be applied under bonus depreciation. However, in 2021, business owners can apply it to 100% of the upfront cost of an asset.
This means that both Section 179 and bonus deduction can be applied to the entire cost in the same year.
Another difference between 2021 and other years is that both new and used equipment can be deducted. Section 179 has always covered both, but in the past bonus depreciation only applied to new equipment. Now, as long as the vehicles or equipment are “new to you”, they qualify for bonus depreciation too.
So, as you can see, if a business spends more than the current Section 179 spending limit, bonus depreciation can come in very handy.
Additionally, you can still deduct some of the costs of that new equipment even if your business sees a net loss during that tax year. If there are no taxable profits, the loss can be carried forward into future years.
Other Things to Know About Section 179 vs Bonus Depreciation
Here are a few additional differences between these two tax-saving methods:
- Section 179 can be used to cover property upgrades; bonus depreciation cannot.
- Section 179 can be applied over time if you prefer (i.e. Deducting half of a tractor purchase this year and spreading the rest out over the next several years.); bonus depreciation must be applied to 100% of that item’s cost that year.
- Section 179 can be applied to different types of purchases; if bonus depreciation is applied to one particular type of purchase in a given year, it must be applied to all similar purchases in that category…you can’t pick and choose.
- Section 179 deductions cannot be larger than your annual business income; bonus depreciation is not limited
Count on an Accountant Who Knows
We realize that this type of tax talk can get complicated pretty quickly! Every business is unique, so anything you’ve read here is only meant to broadly cover the topic. Your mileage may vary.
When dealing with potentially complicated tax questions, it’s always wise to talk with an accountant who understands all the laws and regulations that apply to your specific situation. When you add in the ever-changing rules regarding Section 179 and bonus depreciation, you definitely need a good CPA firm on your side!
CRS CPA has over 40 years of experience helping farmers and small business owners navigate difficult and confusing financial matters. We understand how important it is to be able to save every dollar that you can for your business!
Our Farm & Ag Accounting Services have been giving farmers all across Tennessee relief from their financial stresses for a long, long time.