Depreciation Rules
Section 179 Versus Bonus Depreciation for the Study Decision
How the Section 179 expensing election differs from bonus depreciation, where each may be relevant to rental and commercial owners, and what to confirm.
Part of the Depreciation and Bonus Rules hub. See also the FAQ and the glossary.
Section 179 and bonus depreciation both allow faster deduction of the cost of certain property. They are different tools with different rules, and they sometimes appear in the same discussion of cost segregation. This page explains the differences in general terms. Limits and eligibility change, so verify current law.
Section 179 in brief
Section 179 lets a taxpayer elect to deduct, in the year of placing property in service, the cost of qualifying property up to an annual dollar limit. The limit reduces when total qualifying purchases exceed a threshold. Deductions are also limited by taxable income from the taxpayer's active trades or businesses. The dollar limits and thresholds are indexed or adjusted by legislation, and were changed in recent legislation, so check the current numbers.
Bonus depreciation in brief
Bonus is generally applied automatically unless you elect out, has no dollar cap, and is not limited by business income in the same way, though other loss limits still apply. See Bonus Depreciation: Rules as Currently Understood (Verify).
Key differences
| Feature | Section 179 | Bonus depreciation |
|---|---|---|
| --- | --- | --- |
| Election | Elected item by item | Automatic unless elected out by class |
| Dollar limit | Yes | No |
| Business income limit | Yes | No, though other limits apply |
| Property covered | Qualifying property, with special rules for real property improvements | Property with recovery period of 20 years or less, subject to conditions |
| Ability to create a loss | Limited by income | Can create a loss |
This is a generalization for orientation.
Where each tends to arise for real estate owners
Residential rental property. The rules generally limit Section 179 for property used in residential rental, so bonus is more commonly the relevant tool for reclassified components. Confirm the rules for your property.
Commercial property. Section 179 may apply to certain improvements to nonresidential real property, such as roofs, heating and air conditioning, fire protection, and security systems, under specific conditions, as well as to qualifying tangible personal property used in a business. Whether it helps depends on your facts.
Short-term rental and hotel-like properties. Classification questions arise. Ask your preparer.
Why 179 sometimes matters despite bonus
Section 179 can be useful when you want to select specific items to expense while leaving other items to be depreciated, or when bonus percentage is lower than 100 percent. It can also matter in states that treat 179 differently from bonus. The business income limit is the main constraint, and it limits its use for owners without active business income.
Interaction with cost segregation
A study identifies the components. Bonus, or in some cases 179, determines how fast they are deducted. If both are available, the tax rules generally apply 179 first and bonus to the remainder. Your preparer will decide which route is better.
Recapture
Property expensed under 179 or bonus can be subject to recapture on sale. If business use falls below a threshold, recapture can also apply. See Depreciation Recapture on Sale: What Comes Back.
State treatment
States often treat 179 differently from bonus, and state limits differ. See State Conformity to Federal Bonus Depreciation.
A decision approach
- Identify which components will be in shorter classes.
- Ask whether bonus applies and at what percentage.
- Ask whether 179 is available and whether it adds value.
- Model the federal and state effects.
Recordkeeping for elections
Elections under Section 179 are made on the return and generally require you to describe the property and its cost. Keep a schedule of which items were expensed and which were depreciated. When you sell or stop using property in a business, recapture may apply. Ask your preparer for a reminder list of the items you expensed so that you do not forget them later.
Choosing a route
The decision between routes is not one that you have to make alone. Give your preparer the facts and ask for a comparison of federal and state results across the options. The best route for a given year may not be the best for the next.
A scenario comparing the two
Suppose an owner of a small commercial building replaces a roof and installs new heating and cooling equipment in the same year. If the property is nonresidential and the improvements qualify, Section 179 may be an option for the roof and equipment, subject to the annual limit and the business income limit. If the owner instead relies on bonus, the treatment would depend on whether the improvements are qualified improvement property or another qualifying class. Which route is better depends on the owner's income, the dollar limits, and state treatment. That is a question for the preparer, but knowing that two routes may exist is helpful.
Limits that catch owners by surprise
The business income limit means that a passive investor without active business income may find Section 179 unavailable or limited. Also, Section 179 property must generally be used predominantly in a trade or business, which affects certain rentals. Keep records of use, and consult your preparer.
Next steps
Read How Bonus Depreciation and Cost Segregation Interact and Depreciation Classes: 5, 7, 15, 27.5, and 39 Years.