Section 179 & Bonus
This deduction allows businesses to immediately expense qualifying assets but is subject to an annual dollar limit, a phaseout, and a business income limitation.
What is Section 179 Expense
What is the deduction for Start-Up costs
What is:
5,000
This cost recovery method allows businesses to deduct the cost of natural resources as they are extracted.
What is Depletion
List three conditions or requirements that property must meet to qualify for bonus depreciation.
1. Must be qualifying tangible personal property.
2. Must have a recovery period of 20 years or less
3. Can be new or used property.
A business purchases another company and allocates part of the purchase price to goodwill, customer lists, and office equipment. Explain which assets are amortized, which are depreciated, and the applicable recovery period for the assets.
Goodwill and customer lists: Amortized over 180 months
Equipment: 7 years
Identify the three pieces of information needed to calculate cost depletion.
Adjusted basis of the natural resource
Estimated recoverable units remaining
Number of units extracted during the year
Describe how the Section 179 deduction phases out in 2026, including when the phaseout begins and how the deduction is reduced.
What is a dollar-for-dollar reduction in the $2,560,000 deduction limit once qualifying property placed in service exceeds $4,090,000, with the deduction fully phased out at $6,650,000?
A business begins operations on October 1, 2026, after incurring $54,000 in startup costs. Assuming no startup costs have previously been deducted or amortized, calculate the total startup cost deduction allowed in 2026.
Phaseout: $54,000 − $50,000 = $4,000
Immediate deduction: $5,000 − $4,000 = $1,000
Amount amortized: $54,000 − $1,000 = $53,000
Amortization: ($53,000 ÷ 180) × 3 months = $883.33
Total 2026 deduction: $1,883.33
A mining company purchases a mineral deposit for $600,000 containing an estimated 30,000 tons. During the first year, it extracts 8,000 tons. Calculate the cost depletion deduction.
Depletion per ton: $600,000 ÷ 30,000 = $20
Deduction: 8,000 × $20 = $160,000
In 2026, a business purchases $5,000,000 of qualifying equipment. Assuming sufficient taxable income, calculate the maximum Section 179 deduction and the amount eligible for 100% bonus depreciation.
What is:
Phaseout: $5,000,000 − $4,090,000 = $910,000
Section 179 limit: $2,560,000 − $910,000 = $1,650,000
Remaining basis: $5,000,000 − $1,650,000 = $3,350,000
Bonus depreciation: $3,350,000
A business incurs $400,000 in domestic research and experimentation costs during 2026. Explain the two possible tax treatments available under the OBBB and how they affect the timing of deductions.
Immediate expensing: Deduct the full $400,000 in 2026.
Capitalization: Elect to capitalize and amortize the costs over 5 years.
A mining company purchases a mineral deposit for $900,000 with an estimated 15,000 tons. During Year 1, it extracts 4,000 tons. At the beginning of Year 2, the company revises its estimate to 12,000 tons remaining. If it extracts 3,000 tons in Year 2, calculate the Year 2 depletion deduction.
Year 1 depletion: ($900,000 ÷ 15,000) × 4,000 = $240,000
Remaining basis: $900,000 − $240,000 = $660,000
Revised depletion rate: $660,000 ÷ 12,000 = $55 per ton
Year 2 deduction: $165,000
A business purchases qualifying equipment but decides not to claim Section 179. Explain two reasons why a business might choose bonus depreciation instead of Section 179, and identify one situation where Section 179 may be more beneficial.
Bonus depreciation has no annual dollar limit or phaseout.
Bonus depreciation is not limited by business income and can create a taxable loss.
Some assets are not eligible for bonus depreciation but eligible for section 179
A business acquires a patent as part of purchasing another company and separately purchases a patent from an unrelated inventor. Explain why these two patents may have different amortization periods.
Patent acquired with a business: Generally amortized over 15 years under Section 197.
Separately purchased patent: Generally amortized over its remaining useful life if Section 197 does not apply.
A mining company discovers that its estimated mineral reserves are significantly lower than originally expected. Explain how this affects future cost depletion deductions and whether previously claimed deductions must be adjusted.
The depletion rate per unit increases because fewer recoverable units remain.
The company recalculates the rate using the remaining adjusted basis and revised estimated reserves.
Previously claimed depletion deductions are not adjusted.
Total cost depletion cannot exceed the property's adjusted depreciable basis.