100% special deprecation allowance

[wallygator2zzz]

What is the advantage of the 100% special depreciation allowance vs, section 179 deduction?

[DawnC]

They are similar, but apply to different kinds of properties and situations.   

Section 179 Expense Deduction

It's a dry name for a deduction (taken from a line in the Internal Revenue Code) but it allows you to deduct the entire cost (subject to certain limitations) of an asset in the year you acquire and start using it for business.    Here are the rules and limitations for 2020:

• The asset must be tangible personal property, including software (not real estate).
• It must be used in a trade or business (property used in a rental activity is generally not eligible).
• You must take the deduction in the year you start using the asset.
• The decision to use Section 179 must be made in the year the asset is put to use for business.
• The deduction cannot be more than your earned income (net business income and wages) for the year.

For 2020, the maximum Section 179 deduction is $1,000,000. If your total acquisitions are greater than $2,500,000 the maximum deduction begins to be phased out.  

If the business is an S corporation, partnership or multi-member LLC, it cannot pass the Section 179 deduction on to shareholders, partners or members unless the business has income. The individual must also have earned income to take the deduction.

NOTE: TurboTax walks you through the Section 179 deduction for applicable assets, and handles the calculations, too.

Bonus Depreciation

Bonus depreciation has been changed for qualified assets acquired and placed in service after September 27, 2017.    The old rules of 50% bonus depreciation still apply for qualified assets acquired before September 28, 2017.   These assets had to be purchased new, not used.    The new rules allow for 100% bonus "expensing" of assets that are new or used. The percentage of bonus depreciation phases down in 2023 to 80%, 2024 to 60%, 2025 to 40%, and 2026 to 20%. After 2026 there is no further bonus depreciation.  This bonus "expensing" should not be confused with expensing under Code Section 179 which has entirely separate rules, see above.

The 100% expensing is also available for certain productions (qualified film, television, and live staged performances) and certain fruit or nuts planted or grafted after September 27, 2017.

50% bonus first year depreciation can be elected over the 100% expensing for the first tax year ending after September 27, 2017.

TurboTax Tips

• Any Section 179 deduction that is not used in the current year because it is greater than your business income can be carried over to subsequent years.
• If a business (S corporation, partnership or LLC) has no operating income but the shareholder, partner or member has taxable income, it might be better for the business to use regular depreciation. Regular depreciation becomes part of the business operating loss that passes through to the shareholder, partner or member.

How can I get the most favorable tax treatment for my business assets? TurboTax covers depreciation, special first-year expensing rules, and dispositions.  See Managing Assets.

[Carl]

The downside:

SEC179 deduction is not allowed for residential rental real estate.

The Special Depreciation allowance can have the potential to bite. Remember, all depreciation is recaptured and taxed in the tax year you sell the asset. That recaptured depreciation is added to your cost basis and can have the potential to bump you into the next higher tax bracket.

Now while recaptured depreciation is taxed at a max of 25%, it doesn't matter if you're already in the 24% or higher tax bracket. But if you're in the 12% tax bracket and the recaptured depreciation bumps your AGI over the threshold into the 22% tax bracket, then it is what it is.

If you have a 5 year asset that qualifies for the SDA or SEC179 and take it, then you sell the asset before you "would" have fully depreciated it using the MACRS schedule, having to recapture all that depreciation can bite you on the tax front.

In other words, what may save you a bit now, has the potential to bite you back many times over later when you have to recapture that depreciation. IT all comes down to timing and hoping nothing disastrous happens that would force an early recapture.

When it comes to rental property, I personally don't take any Special Depreciation Allowance on anything. That's because rental property almost always operates at a loss every single year anyway, on paper at tax filing time. So taking the SDA doesn't really provide any benefit to me, that I would not be paying more for later.