Section 179 &
Bonus Depreciation

Master the two most powerful accelerated depreciation tools for the CPA REG exam: how they work, when to apply them, and how they reduce taxable income in Year 1.

CPA Regulation (REG)

What Is Depreciation?

When a business buys a long-lived asset (equipment, vehicles, machinery), the cost is not deducted all at once. Instead, it is spread over the asset's useful life through annual depreciation deductions. This is called the Modified Accelerated Cost Recovery System (MACRS).

Two Acceleration Tools

Section 179

An election to expense up to a dollar limit in the year the asset is placed in service. Subject to a taxable income limitation.

Bonus Depreciation

An automatic additional first-year deduction on qualifying new (or used) property. No income limit, but the percentage phases down over time.

Why This Matters for the CPA Exam

★ Tax Savings

Accelerated deductions reduce current-year taxable income, improving cash flow for the business.

★ REG Exam Weight

Section 179 and bonus depreciation appear frequently in REG MCQs and simulations.

★ Ordering Rules

The exam tests whether you know the correct order: Section 179 first, then bonus, then regular MACRS.

Section 179: The Rules

1

Dollar Limit (2023): Maximum deduction of $\$1{,}160{,}000$ per year across all qualifying assets.

2

Investment Ceiling: The $\$1{,}160{,}000$ limit is reduced dollar-for-dollar once total qualifying property placed in service exceeds $\$2{,}890{,}000$.

3

Taxable Income Limit: The Section 179 deduction cannot exceed the business's taxable income (before Section 179). Any excess carries forward.

4

Election: The taxpayer must elect Section 179 on a timely filed return (including extensions).

Section 179 Phase-Out Visual

Bonus Depreciation: The Rules

1

Percentage: For assets placed in service 2023-2026, the bonus rate phases down: $80\%$ (2023), $60\%$ (2024), $40\%$ (2025), $20\%$ (2026).

2

No Dollar Limit: Unlike Section 179, there is no cap on the total amount of bonus depreciation.

3

No Income Limit: Bonus depreciation can create or increase a net operating loss (NOL).

4

Qualifying Property: MACRS property with a recovery period of $20$ years or less, plus certain qualified improvement property.

Section 179 vs. Bonus Depreciation

	Section 179	Bonus Depreciation
Dollar Limit	$\$1{,}160{,}000$	None
Income Limit	Yes: cannot exceed taxable income	No: can create an NOL
Elective?	Yes: must elect	Automatic (opt-out available)
Excess Treatment	Carries forward	N/A (unlimited)
Property Types	Tangible personal property, off-the-shelf software	$\text{MACRS} \le 20\text{ yr}$, qualified improvement property

The Ordering Rule

Step-by-Step Calculation

1

Identify the asset cost and confirm it qualifies (tangible personal property, $\le 20$ yr MACRS life).

2

Check the Section 179 limits: Is total qualifying property under $\$2{,}890{,}000$? Is the election amount $\le$ taxable income?

3

Subtract Section 179 from cost to get the remaining depreciable basis.

4

Apply bonus depreciation (e.g., $80\%$) to the remaining basis.

5

Compute regular MACRS on any leftover basis (using half-year or mid-quarter convention).

6

Sum all three for the total Year 1 depreciation deduction.

Example 1: Basic Calculation

A business purchases 7-year MACRS equipment for $\$200{,}000$ in 2023. Taxable income before Section 179 is $\$500{,}000$. The 2023 bonus rate is $80\%$. Total qualifying property is under $\$2{,}890{,}000$.

Example 2: Using Both Tools

A company buys 5-year MACRS equipment for $\$1{,}500{,}000$ in 2023. Taxable income is $\$1{,}200{,}000$. Total qualifying property is under $\$2{,}890{,}000$. Bonus rate: $80\%$. The 5-year MACRS first-year rate (half-year convention) is $20\%$.

1

Section 179: Elect the maximum, but limited to taxable income: $\$1{,}160{,}000$ (since income $\$1{,}200{,}000 > \$1{,}160{,}000$).

2

Remaining basis: $\$1{,}500{,}000 - \$1{,}160{,}000 = $ $\$340{,}000$.

3

Bonus depreciation: $80\% \times \$340{,}000 = $ $\$272{,}000$.

4

Remaining basis after bonus: $\$340{,}000 - \$272{,}000 = \$68{,}000$. Regular MACRS: $20\% \times \$68{,}000 = $ $\$13{,}600$.

Example 3: Income Limitation

Same facts as Example 2, but taxable income is only $\$800{,}000$.

1

Section 179: Limited to taxable income: $\$800{,}000$ (not $\$1{,}160{,}000$). The excess $\$360{,}000$ carries forward.

2

Remaining basis: $\$1{,}500{,}000 - \$800{,}000 = $ $\$700{,}000$.

3

Bonus depreciation: $80\% \times \$700{,}000 = $ $\$560{,}000$. (No income limit for bonus!)

4

Regular MACRS: $20\% \times (\$700{,}000 - \$560{,}000) = 20\% \times \$140{,}000 = $ $\$28{,}000$.

The Investment Ceiling Phase-Out

A business places $\$3{,}100{,}000$ of qualifying property in service. Taxable income is $\$2{,}000{,}000$.

1

Excess over ceiling: $\$3{,}100{,}000 - \$2{,}890{,}000 = $ $\$210{,}000$.

2

Reduced 179 limit: $\$1{,}160{,}000 - \$210{,}000 = $ $\$950{,}000$.

3

Income check: $\$950{,}000 < \$2{,}000{,}000$, so no further reduction. Allowable Section 179: $\$950{,}000$.

Common Mistakes

✕ Wrong Order

Applying bonus depreciation before Section 179. Always deduct 179 first, then bonus on the remaining basis.

✕ Ignoring Income Limit

Forgetting that Section 179 cannot exceed taxable income. The excess carries forward, not disappears.

✕ Applying Income Limit to Bonus

Bonus depreciation has no income limit. It can create a net operating loss.

✕ Forgetting the Phase-Out

Not reducing the $\$1{,}160{,}000$ limit when total property exceeds $\$2{,}890{,}000$.

✕ Wrong MACRS Basis

Computing regular MACRS on the original cost instead of the basis after subtracting both 179 and bonus.

Summary Comparison

Feature	Section 179	Bonus	Regular MACRS
Year 1 Deduction	Up to $\$1.16\text{M}$	$80\%$ of basis (2023)	Per MACRS table
Dollar Cap	Yes	No	No
Income Limit	Yes	No	No
Elective	Yes	Auto (opt-out)	Required
Creates NOL?	No	Yes	Yes
Order Applied	1st	2nd	3rd

Question 1 of 5

A sole proprietor purchases $\$300{,}000$ of 7-year equipment in 2023. Taxable income before Section 179 is $\$250{,}000$. What is the maximum Section 179 deduction?

Section 179 cannot exceed the taxpayer's taxable income. Since $\$300{,}000 > \$250{,}000$, the deduction is limited to $\$250{,}000$. The $\$50{,}000$ excess carries forward.

Question 2 of 5

Which of the following statements about bonus depreciation is correct?

Bonus depreciation is automatic (not elective), has no dollar limit, can create an NOL, and is applied to the depreciable basis after Section 179 has been subtracted.

Question 3 of 5

A corporation places $\$3{,}000{,}000$ of qualifying property in service in 2023. What is the reduced Section 179 dollar limit?

The excess over the $\$2{,}890{,}000$ ceiling is $\$3{,}000{,}000 - \$2{,}890{,}000 = \$110{,}000$. The reduced limit is $\$1{,}160{,}000 - \$110{,}000 = $ $\$1{,}050{,}000$.

Question 4 of 5

Equipment costs $\$500{,}000$. Section 179 elected: $\$500{,}000$. Taxable income: $\$400{,}000$. Bonus rate: $80\%$. 7-year MACRS first-year rate: $14.29\%$. What is the total Year 1 deduction?

Section 179: limited to $\$400{,}000$ (income limit). Remaining basis: $\$500{,}000 - \$400{,}000 = \$100{,}000$. Bonus: $80\% \times \$100{,}000 = \$80{,}000$. MACRS basis: $\$100{,}000 - \$80{,}000 = \$20{,}000$. MACRS: $14.29\% \times \$20{,}000 = \$2{,}858$. Total: $\$400{,}000 + \$80{,}000 + \$2{,}858 = $ $\$482{,}858$.

Question 5 of 5

A taxpayer's Section 179 deduction exceeds taxable income by $\$75{,}000$. What happens to the excess?

The excess Section 179 amount over taxable income carries forward indefinitely to future years. It does not expire, carry back, or convert to a different type of deduction.

	Section 179	Bonus Depreciation
Dollar Limit	\(\$1{,}160{,}000\)	None
Income Limit	Yes: cannot exceed taxable income	No: can create an NOL
Elective?	Yes: must elect	Automatic (opt-out available)
Excess Treatment	Carries forward	N/A (unlimited)
Property Types	Tangible personal property, off-the-shelf software	\(\text{MACRS} \le 20\text{ yr}\), qualified improvement property

Feature	Section 179	Bonus	Regular MACRS
Year 1 Deduction	Up to \(\$1.16\text{M}\)	\(80\%\) of basis (2023)	Per MACRS table
Dollar Cap	Yes	No	No
Income Limit	Yes	No	No
Elective	Yes	Auto (opt-out)	Required
Creates NOL?	No	Yes	Yes
Order Applied	1st	2nd	3rd

Section 179 &Bonus Depreciation

What Is Depreciation?

Two Acceleration Tools

Why This Matters for the CPA Exam

Section 179: The Rules

Section 179 Phase-Out Visual

Bonus Depreciation: The Rules

Section 179 vs. Bonus Depreciation

The Ordering Rule

Step-by-Step Calculation

Example 1: Basic Calculation

Example 2: Using Both Tools

Example 3: Income Limitation

The Investment Ceiling Phase-Out

Common Mistakes

Summary Comparison

Question 1 of 5

Question 2 of 5

Question 3 of 5

Question 4 of 5

Question 5 of 5

Section 179 &
Bonus Depreciation