Comparing the provisions for tax planning

The act expanded the Sec. 179 and bonus depreciation provisions to stimulate economic growth and encourage business investment. The modifications to both provisions can provide significant tax savings. At first glance, both provisions appear similar, as each allows for an immediate deduction for capital assets in the year of acquisition. However, these two tax benefits can be used together in the same year, providing taxpayers with additional opportunities to optimize their deductions. Thus, the critical question for practitioners is how to strategically utilize the specific provisions of both Code sections to maximize tax savings.

In each case, it is essential to understand the financial results of the business, the type of assets being acquired, and the owners’ preference for taking an immediate deduction, as opposed to spreading the deduction over multiple years.

Furthermore, understanding the specific advantages and limitations of both the Sec. 179 deduction and bonus depreciation is crucial for properly advising clients and maximizing their tax savings. One notable limitation of the Sec. 179 deduction is that the deduction cannot exceed the taxpayer’s total taxable income derived from its active conduct of any trade or business during the tax year. In calculating the taxable income (or loss) of an actively conducted trade or business of a partnership, guaranteed payments to partners are not taken into account. In calculating the taxable income (or loss) of an actively conducted trade or business of an S corporation, compensation paid to shareholder–employees of the S corporation is not taken into account. Another significant limitation of a Sec. 179 deduction, as discussed above, is the dollar limitation on the deduction and the phaseout of the deduction once certain purchase amounts are reached.

That said, a Sec. 179 deduction offers a distinct advantage over bonus depreciation by allowing business owners to choose the specific dollar amount to deduct in the given year. It is applied on an asset–by–asset basis. In contrast, bonus depreciation must be applied to all assets within a specified class life placed in service during the year.

As 2025 winds down, it is vital for businesses to evaluate the most advantageous approach to using these two provisions. Businesses, even if they are not traditionally capital–intensive, need to review their potential capital acquisitions for the remainder of 2025. As a result of the changes from the act, there may be a stronger incentive to invest in additional capital assets before year end.

Previously, under the old law, the reduced bonus depreciation percentage may have discouraged some businesses from using this provision. However, with the restoration of 100% bonus depreciation under the act, year–end planning takes on renewed importance. As 2025 comes to a close, projections should be computed for both estimated tax payments and anticipated tax liabilities for the current and following tax years. With this new perspective on capital acquisitions, many taxpayers may find that their 2025 tax liability is substantially lower than originally projected prior to the enactment of the act.

One key consideration when calculating 2025 projections for capital improvements is how depreciation provisions are treated in the states where the business will file tax returns. While certain states conform to the federal treatment of the Sec. 179 deduction, many do not conform to federal bonus depreciation — particularly with the reinstatement of 100% federal bonus depreciation. Projections should account for federal and state tax impacts, factoring in which federal deductions are accepted by each state. In many cases, states will require significant addbacks for 100% bonus depreciation and allow only an offsetting smaller deduction under the state’s own depreciation provisions.

Another valuable planning consideration as a result of the more favorable depreciation rules is the use of cost segregation studies. Particularly effective in the real estate sector, a cost segregation study reclassifies certain nonstructural components of a building into shorter–lived property. The reclassified assets often qualify for both Sec. 179 and bonus depreciation, depending on their assigned class lives. The resulting increase in depreciation deductions can reduce federal taxable income, thereby improving cash flow and providing additional capital for potential growth.