What is Special Depreciation & Is It the Right Move?
There are many ways to depreciate an asset, including special depreciation, bonus depreciation, and regular depreciation. Let’s start by defining what depreciation is. Per Investopedia: “Depreciation is a crucial accounting practice that spreads the cost of expensive assets, like equipment, across their useful life.”
Regular depreciation has multiple methods. Straight line, the Modified Accelerated Cost Recovery System (MACRS), and Double Declining Balance are commonly used. However, to understand why your accountant might recommend special depreciation, let’s focus on that option.
Special/Bonus Depreciation
In 2025, bonus depreciation was being phased out, with the allowed percentage decreasing each year. Once the One Big Beautiful Bill came out, it was supposed to be only a 40% deduction. However, that was updated as well, and now any asset purchased after January 19th of 2025 can be deducted at a full 100%.
Many different assets can qualify for bonus depreciation. Vehicles are frequently used by clients, but other eligible assets may include machinery, equipment, tools, computers, and certain improvements to non-residential property. However, it is important to note that while a building could potentially qualify, the land component of its cost cannot be depreciated and should not be included in the asset basis for bonus depreciation purposes.
Section 179
While we talked about the wide range of assets eligible for special depreciation, Section 179 is much stricter. Not only are there weight limits on the assets that qualify, but there are also monetary and income caps for the business. The business cannot incur a loss with 179 depreciation, unlike with bonus depreciation.
There are phase-out thresholds each year, so make sure you are informed before applying 179 depreciation. It makes the most sense to use that 179 depreciation on assets that do not qualify for the bonus depreciation, such as improvements.
At this point, you may wonder why all of this matters for your business decisions.
If your business had a large income for 2025, the 179/bonus/special depreciation will help reduce that tax liability and net income.
There are some drawbacks, though, that you should take into account before deciding if bonus depreciation is right for your business.
- Is this influx of income limited to this year, or would it be better to expense the vehicle over many years if you expect year-over-year growth?
- Are you looking at your 3 to 5-year plan for the business, and does this fit into it? Meaning you have accounted for any assets the business may need going forward, and knowing you will still have depreciation expenses in those years.
- Do you plan to sell or reduce the size of your fleet in those same years? Depreciation will be “recaptured” at the time of the sale. This means that if you depreciate the vehicle to a 0 basis, any amount you receive from the sale will be taxable as a gain.
- What is your personal tax situation, and how will it affect you? Obviously, this depends on the entity’s tax status and whether the income will roll over onto your personal taxes.
- Does it make sense for your entity’s tax status? If special depreciation causes your business to have a loss, it is beneficial to an LLC or Schedule C filer because the loss will carry against your income. If you are an S-Corp or a partnership, a loss will not affect your personal taxes.
There are many questions to ask before deciding on the best method for your business. These methods require more than just solid accounting; they require short- and long-term business planning. If you need help with either of these, feel free to reach out to us at 864-351-0852 or info@waterfordbusiness.com with any questions about your business.
