As Bonus Rates Decline, Real Estate Owners Seek Benefit in Other Strategies

As we wait to see if bonus depreciation rates are restored to 100% by Congress, the thoughtful taxpayer continues to seek alternative savings strategies. Sec. 179 expensing and the Tangible Property Regulations are important parts of a comprehensive tax plan, and as bonus steps down, these strategies are taking on a new importance for many. 

What is Section 179 Expensing? 

Section 179 is an entity-level election that permits the full purchase price of a qualifying asset to be deducted completely in the year of purchase. The election is intended to encourage small or medium-sized companies to invest in themselves.  

Qualifying assets have always included things companies need -- computers, office furniture, and business-related vehicles. The Tax Cuts and Jobs Act extended the scope of the election to include improvements to the following building systems: 

• Roofs 
• Fire alarm and protection systems 
• Security systems 
• HVAC 
• Qualified Improvement Property 

The Section 179 election must be taken in the year the work is placed-in-service.  

Section 179 Expensing Limits and Spending Caps  

Sec. 179 Expensing Limit*: The maximum amount that may be written off under Sec. 179. The expensing limit continues to increase annually.  

Sec. 179 Spending Cap**: The maximum amount a company can spend on qualified assets before the Sec. 179 Deduction available to it begins to be reduced. This “spending cap” is what makes this Deduction exclusively for “small” or “medium-sized” companies – if you get too large and spend too much, the amount of the Deduction available to you begins to decrease until it phases out completely.  

For context, in TY 2024 companies that spend more than $4.27M on qualified assets are no longer eligible for the Sec. 179 Deduction. Larger businesses like these will rely more on bonus depreciation, which we’ll discuss further below. 

A few more important considerations regarding Sec. 179:  

• Section 179 expensing can only be taken on a non-residential trade or business, so it won’t apply to every real estate situation. 
• The immediate benefit of Section 179 expensing is generally limited to profitable entities.  
• The Sec. 179 Deduction value cannot exceed your net taxable income. 

Section 179 Expensing Vs. Bonus Depreciation

Bonus depreciation permits the additional write-off of an eligible asset’s value above and beyond standard depreciation. New and used assets with class lives of 20-years or less are eligible for this “bonus,” which can significantly boost tax savings.

Bonus depreciation rates were set at 100% for 5 years under the TCJA. During that period, bonus and Sec. 179 were essentially equivalent in that both strategies permitted the immediate deduction of 100% of a qualified asset.

However, bonus rates have begun to decline by 20% annually. In 2024, 60% of an asset’s cost may be written off using bonus. Section 179 expensing, however, will continue to permit the immediate expense of 100% of the asset cost, and as such it is an attractive option for the savvy taxpayer.

Let’s review some major differences between these two incentives: 

• Section 179 permits the expensing up to a set dollar amount, while bonus depreciation permits the deduction of a percentage of a cost. 
• Section 179 can be applied selectively:  

• If you bought 30 computers this year, you may choose to expense only 10 of those machines using Section 179 expensing.  
• Bonus doesn’t work that way. Computers have a 5-year MACRS class life. If you decide to take bonus depreciation on those 10 computers, you must take bonus on ALL 30 of the computers, and in fact, on all 5-year property. You can’t “pick and choose” how bonus is applied.  
• As alluded to above, Sec. 179 can be claimed to offset net income only. Its value cannot exceed net income and push a taxpayer into a loss. Bonus depreciation is not limited by your net business income and may be employed even if your business was not profitable in a given year. 

Additionally, when evaluating Sec. 179 vs. bonus, taxpayers need to consider any potential state limitations. The Sec. 179 limits provided above are based on federal guidelines, but many states have established their own parameters for 179 expensing, and some states don’t recognize it at all. Many states also don’t recognize the aggressive bonus depreciation available at the federal level. It’s important to consider the impact of state-specific legislation when comparing 179 expensing and bonus depreciation. 

The chart below compares Sec. 179 and bonus depreciation: 

Expensing Under the Tangible Property Regulations 

The thoughtful taxpayer looking for write-offs will recognize that their options aren’t limited to bonus and 179 expensing. The Tangible Property Regulations offer two very useful Safe Harbor elections that permit expensing: 

De Minimis Safe Harbor  

Under the De Minimis Safe Harbor, taxpayers with Applicable Financial Statements (AFS) may deduct up to $5,000 per item/invoice. (For taxpayers without an AFS, the value of the deduction drops to $2,500.)  A detailed invoice is crucial to successfully taking this election.  

Routine Maintenance Safe Harbor  

Under this Safe Harbor, taxpayers can deduct amounts spent on routine maintenance with no cap. 

Routine maintenance is a “preventative or cyclic maintenance that is an essential part of the ongoing care and upkeep of a building and its systems.”  Things like inspecting, cleaning, testing, and replacing worn assets with comparable ones fall under this heading. Any replacement that improves the property, however, is not eligible 

There is a third expensing option under the TPRs, the Safe Harbor for Small Taxpayers, but it is utilized much less frequently.  

How to Approach Expensing  

So we’ve laid out several options – Sec. 179 expensing, bonus depreciation, the TPR Safe Harbors.  

But what incentive should take priority?  

In general, we advise that taxpayers first leverage the Tangible Property Regulations, and expense what they can using one of the TPR’s Safe Harbors. We then suggest considering what assets might be eligible for expensing under Section 179, and finally recommend the use of accelerated depreciation, bonus depreciation, etc. to get the most tax savings out of the basis that remains. This is a general guideline and may not apply to every set of facts and circumstances, but it’s a useful framework, especially as bonus rates continue to decrease. 

How to Choose Between Bonus and Section 179 

Clearly, there are multiple complexities to be considered when crafting a maximally beneficial tax plan. We foresee a great deal of continued interaction between bonus and Section 179, and taxpayers will need to approach this strategically for best outcomes. If you need help identifying which option is best for you, reach out to our team with the form below.