Equipment expensing: Section 179, bonus depreciation, and recapture

How it works

Section 179 lets a business elect to deduct up to this year's official section 179 limit (not yet verified here; see the official source below) of qualifying property placed in service during the year, phasing out dollar for dollar once total purchases pass this year's official section 179 phaseout start (not yet verified here; see the official source below), and the deduction cannot exceed the business's taxable income, with the rest carried forward. Bonus depreciation is a separate rule that deducts a set percent of the cost, this year's official bonus depreciation percent (not yet verified here; see the official source below), with no income limit, and it can create a loss. Heavy vehicles over six thousand pounds gross weight escape the passenger car caps but have their own Section 179 ceiling. The property has to be used more than 50 percent for business, and if business use later falls below that, or the item is sold, the deduction taken beyond regular depreciation is recaptured as ordinary income. Both rules apply to used equipment as long as it is new to the business.

What it gives

The entire cost of a purchase can offset this year's income instead of trickling out over five or seven years.

Used equipment qualifies, which suits a business buying a secondhand van or machine.

The business can choose how much of Section 179 to take, item by item.

What it costs, or where the catch is

A big deduction this year means no deduction from that item in later years when income may be higher.

Selling or dropping business use below half triggers recapture as ordinary income.

Section 179 is capped at business income, and some states do not follow the federal rules.

A worked example

Soren buys a $30,000 used delivery van, used 100 percent for his flower business, and elects Section 179 for the whole cost. His business income of $85,000 is enough to absorb it, so the deduction is $30,000 this year, and at a 24 percent rate that saves $7,200 of income tax. Two years later he sells the van for $20,000. His basis is $0, so the $20,000 is recaptured as ordinary income.

Where it goes wrong

The common miss is expensing a vehicle in full and then selling it or shifting it to personal use, which brings the deduction back as income in a year nobody planned for.

Who confirms it for you

For your own numbers, a CPA or enrolled agent. This page explains how the rule works for people in general; it does not know your situation and does not tell you what to do.

The official source

IRS Publication 946, How to Depreciate Property. Every figure that changes by year comes from the site's rules table, which the watcher checks against the official page on a schedule; where a figure is not yet verified, this page says so instead of printing a number.