Everywhere we go, business surrounds us. These days the business sector is growing well. The aim of all businessmen is to earn profit. However, depreciation results in the loss of value of an asset. But even from these, a successful businessman needs to acquire profit. Hence, it is important to know the differences between bonus depreciation and Section 179.
Bonus Depreciation vs Section 179
The main difference between bonus depreciation and section 179 is in the type of asset from where the deduction of depreciation happens. Bonus depreciation deducts a fixed percentage on the cost of acquisition of a fixed asset while section 179 charges a set dollar amount of the newly introduced fixed assets in the business.
Bonus depreciation is a tax incentive that allows charging a fixed percentage on the cost of acquisition of the fixed asset procured in the business. Bonus depreciation is not considered as the most flexible depreciation option as this type of depreciation is applicable to all the fixed assets and also charged on the 100% cost of the fixed asset.
Section 179 is a section or a law introduced by the US IRC. IRC refers to the Internal Revenue Code. It is an immediately charged depreciation and does not allow depreciation on the assets over a period of time. Section 179 sets a dollar aside for all the fixed assets procured by the business instead of charging a fixed rate every year.
Comparison Table Between Bonus Depreciation and Section 179
| Parameters of Comparison | Bonus Depreciation | Section 179 |
| Deduction | Bonus depreciation charges a rate on the cost of acquisition of fixed assets. | Section 179 sets a dollar aside for every purchase of a fixed asset. |
| Annual limit | There is no annual limit on the deduction charged according to bonus depreciation. | There is an annual limit of $1,050,000 currently which may vary in the future. |
| Purchase of fixed assets | There is no limit on the purchase of fixed assets. | There is a limit on the purchase of fixed assets according to section 179. |
| Profit | Bonus depreciation is charged only when the business is running on profits. | Section 179 is charged whether or not a profit is earned. |
| Business Income | The depreciation charge can be higher than the business income. | The depreciation charge must be less than the business income. |
What is Bonus Depreciation?
Bonus depreciation is a tax incentive that charges immediately a percentage of the cost of acquisition of the fixed assets. The distinguishing feature of bonus depreciation from the other depreciation is it is charged immediately on the fixed asset rather than charged over the estimated life of the fixed assets. The aim of this depreciation is to increase the investment of small businesses.
Bonus depreciation is helpful to increase the economic growth and also stimulate the initiative in the small businessmen to invest and grow. The advantage of bonus depreciation is the unlimited purchase of fixed assets as other types of depreciation may impose a restriction on the amount of the fixed assets that can be purchased in a financial year.
However, advantages come with disadvantages inevitably. The disadvantage of bonus depreciation is sometimes the amount charged as depreciation can be higher than the income earned by the business during the respective financial year. Bonus depreciation is allowed to charge depreciation on the fixed assets only when the company is earning a profit.
Bonus depreciation also has no annual limit on the deduction of the fixed assets. Hence, bonus depreciation can also be both profitable and loss depending on the nature of the business.
What is Section 179?
Section 179 is a law introduced by the IRC (Internal Revenue Code) which means an immediate charge of depreciation on fixed assets. Section 179 does not charge a rate on fixed assets but sets dollars aside from the cost of acquisition of fixed assets on the day of procurement of such fixed assets. It includes all equipment, vehicles, machinery, land, etc.
The advantage of Section 179 is that it allows the businessmen to lower their annual tax rates by charging an immediate depreciation rather than consistently charging depreciation every year which results in increased tax every financial year. Section 179 was also introduced as an incentive to the small businessmen and encouraged them to invest more.
Section 179 has the disadvantage of having a limit on the purchase of the fixed assets every financial or calendar year. The limit on the purchases of fixed assets may vary in the future and keep changing consistently according to the economic changes.
However, there is also an annual limit on the depreciation charged under Section 179. Depreciation under section 179 is charged irrelevant of the profits or losses earned by the business and the depreciation charged will always be less than business income.
Main Differences Between Bonus Depreciation and Section 179
- Bonus depreciation is charged as a rate on the cost of fixed assets while in section 179, dollars of the cost of fixed assets will be set aside as depreciation.
- Bonus depreciation can be higher than income while depreciation charged under section 179 can never be higher than the income.
- Bonus depreciation does not have a limit on the purchases of fixed assets while section 179 has imposed a limit on the purchase of fixed assets.
- Bonus depreciation is charged only on profits while section 179 charges depreciation on both profits or losses.
- Section 179 gives more flexible than bonus depreciation.
Conclusion
Both bonus depreciation and section 179 depreciation are introduced as an incentive, to support the small businessmen, to help them grow and increase the economic growth of the country. The selection of bonus depreciation or section 179 will depend on the nature or scale of the business.
Both bonus depreciation and section 179 helps in the reduction of tax in the future years by charging an immediate depreciation instead of calculation depreciation over the period of years which results in increased taxes in the future. Hence, both bonus depreciation and section 179 depreciation are useful for the growth of small businesses.
References
- https://www.sciencedirect.com/science/article/pii/S0278425410000438
- https://search.proquest.com/openview/4b0457236681a722cba7e46662c18597/1?pq-origsite=gscholar&cbl=48426