2023 Changes to Section 179 and Bonus Depreciation
The Section 179 Expense Provision and Bonus Depreciation are two of the most important parts of the IRS tax code for heavy equipment users. What they do is allow businesses to deduct the full purchase price of qualifying equipment that was acquired during the calendar year. Section 179 and Bonus Depreciation are incentives created by the government to encourage businesses to invest in their businesses and purchase the equipment they need.
How Section 179 and Bonus Depreciation work
Section 179 allows businesses to write off the entire purchase price of a piece of qualifying equipment for the current tax year, within certain limits and caps that change from year to year. For example, in 2022 you can deduct up to $1,080,000 with a $2,700,000 cap on expenditures, as well as 100% Bonus Depreciation for new and used machine purchases.
Bonus depreciation is a tax incentive that lets a business immediately deduct a large percentage of the purchase price of eligible assets, such as heavy equipment, instead of writing them off over the “useful life” of that asset. Bonus Depreciation allows business taxpayers to deduct additional costs beyond the Section 179 limits.
Section 179 and Bonus Depreciation are often talked about as going hand in hand, but they are actually two different things. Bonus Depreciation is offered in some years and not in others and can vary in amount from year to year. In 2022, it is offered at 100%, meaning businesses can write off 100% of the cost of most depreciable business assets in the year they are purchased and placed into service. This provision is useful to very large businesses spending more than the Section 179 spending cap.
How Section 179 has been and how it may change in 2023
From 2003 to 2017, Bonus Depreciation was at 50%. Since 2017, it has been increased to 100%, allowing businesses to deduct 100% of the cost of eligible purchases the same year they bought them. Looking forward to 2023, the amount of Bonus Depreciation is set to decrease. Beginning on January 1, 2023, the limits begin to decline:
Year | Max Bonus Depreciation |
2022 | 100% |
2023 | 80% |
2024 | 60% |
2025 | 40% |
2026 | 20% |
What this decrease means is that businesses will not be able to deduct as much of the purchase cost of new or used equipment during the tax year that they bought it. For companies investing in new equipment, this change could affect your cash flow by causing higher tax payments than in previous years, because the allowable deduction maximum is 80% in 2023 instead of the 100% permitted in 2022.
What this change means for you
If you will need more equipment in 2023, consider purchasing it and putting it into service before 2022 ends to take advantage of the higher deduction allowed.
If you have any further questions about Section 179 and Bonus Depreciation, then we recommend you speak with your tax professional.
This information should not be considered tax advice. Consult your tax advisor or the IRS for additional information.