Under current law, taxpayers have a variety of options for deducting some or all of the cost of
property used in business rather than depreciating it over a period of years. Here’s a quick
overview of three of them:
De Minimis Expensing Safe Harbor
Taxpayers with “applicable financial statements” (such as a certified audited financial statement)
can deduct up to $5,000 per invoice or item for certain tangible property costs to the extent they
deduct them for financial reporting or bookkeeping purposes. Those without applicable financial
statements can deduct up to $2,500. Certain exceptions apply.
This safe harbor avoids the need to determine whether low-cost items are deductible or must be
capitalized, as well as the need to depreciate large numbers of small-dollar capital asset
purchases. It does not, however, preclude the deduction of higher-cost items if they’re otherwise
deductible. Taxpayers who make the election must take the deduction for all qualifying property
within the chosen threshold.
Sec. 179 Expensing
Sec. 179 allows taxpayers to deduct, rather than depreciate, up to $1 million in costs of
qualifying tangible property. The deduction is phased out on a dollar-for-dollar basis to the extent
Sec. 179 property exceeds a $2.5 million “investment ceiling.” Property eligible for expensing
generally includes most depreciable property, including computer software (subject to special
rules), other than buildings and certain real property. Certain exceptions and limitations apply.
The Sec. 179 limits are adjusted for inflation. For 2020, the expensing limit is $1.04 million and
the investment ceiling is $2.59 million, increasing to $1.05 million and $2.62 million,
respectively, in 2021.
Bonus Depreciation
Taxpayers are permitted to deduct up to 100 percent of the cost of eligible property acquired and
placed in service after 2017 and before 2023. Starting in 2023, bonus depreciation is scheduled
to be reduced by 20 percent each year and eliminated after 2026. Bonus depreciation is taken
with respect to a particular property after any Sec. 179 deduction and before regular depreciation.
Property that currently qualifies for bonus depreciation includes both new and used tangible
property with a recovery period of no more than 20 years, as well as water utility property and
off-the-shelf computer software. Before 2018, certain building improvements also qualified for
bonus depreciation, but a glitch in the Tax Cuts and Jobs Act of 2017 eliminated that option.
Fortunately, the CARES Act corrected this error, permitting bonus depreciation for “qualified
improvement property” retroactive to the beginning of 2018. Qualified improvement property
includes most improvements to the interior of nonresidential buildings, with exceptions for
building enlargements and improvements to elevators, escalators, or a building’s internal
structural framework. Taxpayers that placed such improvements in service in 2018 or 2019 (and
haven’t already done so) should consider filing amended returns or applying for a change in
accounting method to recover the bonus depreciation benefits they missed in those years.
Special rules apply to property a taxpayer manufactures, constructs, or produces for its own use;
long-production-period property and aircraft; passenger automobiles; and certain other types of
property. Taxpayers can elect out of bonus depreciation for any class of property in a given tax
year.
Taxpayers and their advisors should work together to take advantage of these options in the most
effective manner. All three tax breaks can be used in the same year, but they can’t be applied to
the same costs.
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