The Differences Between Bonus Depreciation and Section 179 - Additional Considerations in 2023
Let’s spend some time today analyzing the difference between IRC 179 and IRC 168(k), which are commonly referred to as Section 179 and Bonus Depreciation, respectively. A lot of you have questions on which tax code is better to use. I’ll lay out how each code section works and additional considerations!
Immediate ‘Write-off’ of Capitalized Assets
We need to differentiate between immediate expensing of an asset versus capitalizing an asset and accelerating the depreciation in full for the year. In the absence of any elections, assets that qualify for bonus depreciation under IRC 168(k) are automatically accelerated and depreciated in full. If that’s not the outcome that’s desirable (based on good planning considerations), then an election to not use bonus depreciation must be made.
Under IRC 179, an asset is instead immediately “expensed” and thus avoids being capitalized and depreciated. I realize this sounds like semantics but the tax outcome may not work out to be the same.
Interplay with the QBI Deduction
This consideration is very important as we consider the qualified business income deduction (‘QBID’) under IRC 199A. Under the code, eligible business activities qualify for a 20% deduction of qualified business income (‘QBI’). QBI is generally limited to either 50% of wages paid or 2.5% of your unadjusted basis immediately after acquisition (UBIA) and 25% of your wages.
In the real estate world, we generally won’t have much in the wages area, which leaves us with the requirement of having enough UBIA in order to qualify to meet the criteria to get this deduction.
For this particular reason, we like bonus depreciation under IRC 168(k) as this allows us to preserve UBIA and maximize our QBI deduction.
The Impact of Tax Year 2023
In the past, unless we had state income tax considerations to consider, such as California which does not conform to bonus depreciation and disregards this code section, we generally elected bonus depreciation and called it a day.
However, with the bonus depreciation rate now down to 80% in 2023 and following tax years will decrease it by 20% each year, IRC 179 is starting to look a little bit more appealing each successive year. It’s not quite a slam dunk yet to pick one over the other, but if you’re not sure which way to go for your real estate investment, then I highly recommend you reach out to us! Hit the orange button below.
-Stephen Morris, CPA, MBT, CCIM
