Section 179 Tax Deduction Limits and First-Year Bonus Depreciation

The numbers keep changing: Here are the IRS Section 179 and bonus depreciation amounts under the Tax Cuts and Jobs Act.

The Tax Cuts and Jobs Act made significant changes to both Section 179 expensing and first-year bonus depreciation. Here is an overview of the changes under the new law.

Section 179 Expensing

Under the Tax Cuts and Jobs Act, the Section 179 annual deduction limit was set at $1 million, effective January 1, 2018. The maximum annual investment limit for qualifying equipment purchases is $2.5 million, also set by the Tax Cuts and Jobs Act. The $1 million annual deduction limit and $2.5 million investment limit will be indexed to inflation starting in 2019.

Under Section 179, you can deduct in a single year the cost of all tangible personal property (new or used) that you buy and use in your business at least 51% of the time up to the annual $1 million limit. You can spend up to $2.5 million on qualifying equipment and still get the full deduction. If you spend more than the $2.5 million investment limit in any one year, the amount you can deduct under Section 179 is reduced dollar for dollar.

For many years, the Section 179 annual limit was decided by Congress after the start of the tax year, creating uncertainty for business owners who rely on this valuable deduction. Often the annual limit wasn’t set until late in the tax year or it was made retroactive which meant that businesses didn’t know the threshold limit when they were making decisions about how much business property to purchase that year. When first enacted, the Section 179 limit was set at a relatively modest $10,000. Over the years, Congress raised the limit to help small businesses in economically hard times.

In 2015, the Section 179 annual deduction limit was permanently set at $500,000 with a $2 million annual investment limit under the Protecting Americans from Tax Hikes Act (PATH Act). Congress, however, revisited the Section 179 limits established under the PATH Act and changed those to the $1 million annual deduction and the $2.5 million annual investment limits now in place under the Tax Cuts and Jobs Act.

Here is a summary of the Section 179 annual limits and the maximum investment limits since they were first enacted.

Section 179 Year Annual Deduction Limit

2018 and on

$1 million

2010–2015

$500,000

2008–2009

$250,000

2007

$125,000

2003

$100,000 – $108,000 (annual limit within this range)

1987–2002

$10,000 – $24,000 (annual limit within this range)

Section 179 Year Maximum Investment Limit

2018 and on

$2,500,000

2010 – 2015

$2,000,000

2008 – 2009

$800,000

2007

$500,000

2003 – 2006

$400,000 – $430,000 (annual limit within this range)

1987 – 2002

$200,000

Bonus Depreciation

In addition to Section 179, bonus deprecation can be used to currently deduct the cost of certain qualifying long-term business property. Unlike Section 179, there is no annual dollar limit on the amount you can deduct using bonus depreciation and you need not use the property at least 51% of the time for business. However, the property must be placed in service in the year the deduction is claimed.

For tax years 2015 through 2017, first-year bonus depreciation was set at 50% under the PATH Act. It was scheduled to go down to 40% in 2018 and 30% in 2019, and then not be available in 2020 and beyond.

The Tax Cuts and Jobs Act increases first-year bonus depreciation to 100%. It goes into effect for any long-term assets placed in service after September 27, 2017.

The 100% bonus depreciation amount remains in effect from September 27, 2017 until January 1, 2023. After that, first-year bonus depreciation goes down as follows:

  • 80% for property placed in service after December 31, 2022 and before January 1, 2024.
  • 60% for property placed in service after December 31, 2023 and before January 1, 2025.
  • 40% for property placed in service after December 31, 2024 and before January1, 2026.
  • 20% for property placed in service after December 31, 2025 and before January 1, 2027.

In addition, under prior law, you could only use bonus depreciation for new property. The Tax Cuts and Jobs Act has changed that rule and now you can use bonus depreciation for purchases of new or used property.

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