Small Business Wednesday — Section 179 and Bonus Depreciation for 2012

What will the Section 179 and bonus depreciation amounts be for 2012? The answer is, if Congress takes no action, the amounts won’t be as generous as they currently are.

Right now, the Section 179 expense limit is $500,000 and the bonus depreciation percentage is 100%. These limits are set to drop to $139,000 and 50% in 2012.

What Do These Terms Mean?

Sometimes tax folks like me throw out terms like “Section 179” and “bonus depreciation” as if the whole world understands what we mean. With that in mind, here is a brief primer on Section 179 and bonus depreciation.

Normally when a business or rental property owner buys assets (such as equipment), the expense is not fully tax deductible in the year of purchase. Instead, the owner claims a deduction called “depreciation” over several years (the length of time is set by the IRS and depends on the type of asset). But Section 179 and bonus depreciation are two ways the expense can be deducted in the year of purchase:

  • Section 179 deductions allow a business owner to deduct the full cost of asset purchases (up to $500,000 in 2011). Rental property owners cannot take Section 179 deductions.
  • Bonus depreciation is an additional deduction allowed beyond the Section 179 deduction. Bonus depreciation can only be taken on brand-new assets. Rental owners can take bonus depreciation deductions. For 2011, the amount of bonus depreciation that can be taken is 100% of the cost of the asset.
Next week I’ll talk more about how to decide which type of deduction to take.