Introduction to Accelerated Tax Depreciation ➡️ Bonus Depreciation and Section 179

What is tax depreciation?
MACRS (Modified Accelerated Cost Recovery System): all assets are divided into classes which dictate the number of years over which an asset's cost will be recovered
Bonus Depreciation: Accelerates depreciation to allow a business to expenses a large portion of an eligible asset’s cost in the 1st year it was purchased
Section 179: Deduction in 1st year for property that you acquire by purchase for use in the active conduct of your trade or business
Example of Straight Line Depreciation versus Tax Depreciation:
• Depreciation and Amort...
Types of Assets
Section 1245 Property = “tangible” or “personal” property
Section 1250 Property = “real property”
What is Bonus Depreciation?
-Tax Cuts and Jobs Act of 2017 significantly increased the ability to utilize bonus depreciation
-includes property used in a trade or business or for the production of income and generally applies to MACRS property that has a recovery period of 20 years or less
What is Section 179?
-Section 179 allows a taxpayer to deduct a set dollar amount of qualified business property each year (qualified real property)
-applies to property used in an active trade or business
What is Depreciation Recapture?
When section 1245 property is sold at a gain, amounts previously claimed as depreciation (allowed or allowable) are recaptured at ordinary income tax rates, and the remaining gain is taxed at capital gains rates. This is because they have already received favorable tax treatment on the property through depreciation or amortization deductions.
When section 1250 property is sold at a gain, the difference between the straight-line depreciation and the accelerated method claimed is taxed as ordinary income, while the rest of the gain is taxed at capital gains rates.
Net Losses
-Businesses can combine bonus depreciation and section 179 depreciation
-Bonus depreciation can create a tax loss
-Section 179 cannot create a tax loss
Also consider watching:
5 Examples of Book to Tax Differences ➡️ GAAP Accounting vs IRS Tax Accounting
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Financial Statement Projections 101 ➡️ Conceptual Overview
• Financial Statement Pr...
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