How to Accelerate Depreciation

Accelerating depreciation isn't just a compliance task; it's a powerful strategy for transforming fixed asset purchases into immediate cash flow and substantial tax savings. By front-loading deductions, businesses can lower their current tax bill, freeing up capital to reinvest, expand operations, or bolster their financial position. This guide walks through the primary methods for accelerating depreciation, explaining how and when to use them for maximum benefit.

Why Accelerate Depreciation? The Strategic Advantage

Depreciation is the systematic allocation of an asset's cost over its useful life. In standard "straight-line" depreciation, the deduction is the same each year. While simple, this method ignores the time value of money—the principle that a dollar today is worth more than a dollar a year from now. A tax deduction taken today provides an immediate cash benefit that can be put to work.

Accelerated depreciation methods let you claim a larger portion of an asset's cost in the first few years of service. The total deduction over the asset's life remains the same, but the timing is shifted forward. This strategic timing provides three key advantages:

• Improved Cash Flow: Lowering your taxable income in the current year means a lower tax payment, leaving more cash on hand for inventory, payroll, or new investments.
• Increased Working Capital: The tax savings today can be reinvested into the business, generating returns that compound over time and potentially exceed the value of future deductions.
• Better Financial Planning: Businesses expecting high-income years can use accelerated depreciation to offset that income. Conversely, they can choose to forgo it in low-income years to save the deductions for when they'll be more valuable.

Core Method 1: Section 179 Expensing

The Section 179 deduction is one of the most direct ways to accelerate write-offs. It allows a business to treat the cost of qualifying property as an immediate expense rather than capitalizing it and depreciating it over many years. Think of it as taking 100% of an asset's depreciation in Year 1.

To qualify, the property must be tangible personal property (like machinery, equipment, computers, and office furniture) purchased for business use and placed in service during the tax year. It also applies to certain qualified real property, such as roofs, HVAC systems, and fire protection systems for nonresidential buildings.

However, there are important limits to understand:

• Deduction Limit: For 2024, the maximum amount you can expense under Section 179 is $1,220,000.
• Investment Limit: The deduction begins to phase out dollar-for-dollar if the total cost of Section 179 property placed in service during the year exceeds a certain threshold. For 2024, this threshold is $3,050,000. Once your purchases hit $4,270,000, your Section 179 deduction is completely phased out.
• Taxable Income Limitation: The Section 179 deduction cannot exceed the business's taxable income for the year. In other words, you can't use Section 179 to create a net operating loss (NOL). Any amount disallowed due to this limitation can be carried forward to future years.

Example: A manufacturing company (with positive taxable income) buys a new CNC machine for $200,000. Using Section 179, it can elect to expense the full $200,000 in the year of purchase. If the company is in a 24% tax bracket, this creates an immediate tax savings of $48,000 ($200,000 x 24%).

Core Method 2: Bonus Depreciation (Section 168(k))

Bonus depreciation is another hugely valuable provision for writing off asset costs immediately. Like Section 179, it allows for the immediate expensing of a percentage of the asset's cost. Unlike Section 179, it is not an election; it is applied automatically unless the taxpayer elects out of it on an asset-class-by-asset-class basis.

Most types of new and used tangible personal property with a recovery period of 20 years or less qualify for bonus depreciation. This includes vehicles, equipment, machinery, and furniture.

Here's where bonus depreciation stands out:

• No Investment Limit: There is no cap on the total amount of property you can place in service to qualify for bonus depreciation. A business could spend $10 million on equipment and still take it.
• No Taxable Income Limitation: Bonus depreciation is not limited by a business's taxable income. In fact, it can be used to generate or increase a net operating loss (NOL), which can then be carried forward to offset future income.

The Tax Cuts and Jobs Act of 2017 set bonus depreciation at 100%, but it is now in a phasedown period. For property placed in service in:

• 2023: The bonus depreciation percentage is 80%.
• 2024: The bonus depreciation percentage is 60%.
• 2025: The bonus depreciation percentage will be 40%.
• 2026: The bonus depreciation percentage will be 20%.

Example: In 2024, a logistics company buys five new delivery trucks for a total of $500,000. It can claim 60% bonus depreciation, which is a $300,000 first-year deduction ($500,000 x 60%). The remaining $200,000 cost basis would then be depreciated over the normal MACRS schedule for light trucks (5 years).

Comparing Section 179 and Bonus Depreciation

Choosing between these two provisions depends on the specific situation. Often, professionals use them together.

• Use Section 179 first when you have profitable businesses that want to keep deductions below the taxable income limit. It preserves future deductions and gives you more control. Since you can pick and choose which assets to apply it to, you can optimize your depreciation by expensing assets with longer recovery periods (like 7-year machinery) and depreciating those with shorter recovery periods (like 5-year computers) over their normal schedule.
• Use Bonus Depreciation when asset purchases exceed the Section 179 thresholds, or when the business has a loss or low income. The ability to create an NOL makes it a powerful tool for businesses in startup or growth phases.

A common strategy is to use Section 179 up to the limit and then apply bonus depreciation to the remaining assets placed in service for the year.

Advanced Strategy: Cost Segregation Studies

For businesses that own commercial real estate, a cost segregation study is a sophisticated and rewarding acceleration strategy. When you buy or construct a building, it's typically depreciated over 39 years for commercial properties (or 27.5 years for residential rentals). This is a slow recovery period.

However, a commercial building is made of hundreds of different components. Some of these components aren't part of the "building structure" itself and can be reclassified as tangible personal property (5- or 7-year property) or land improvements (15-year property). A cost segregation study is an engineering-based analysis that identifies and reclassifies these assets.

Assets commonly reclassified include:

• 5-Year Property: Carpeting, decorative lighting, specific electric wiring for equipment, cabinetry.
• 7-Year Property: Office furniture, cubicles.
• 15-Year Property: Paving, sidewalks, fences, exterior landscaping.

Once reclassified, these shorter-life assets are eligible for accelerated depreciation methods, including bonus depreciation. This can shift a huge portion of the building's cost from a 39-year timeline to a front-loaded schedule.

Example: A company builds a new office for $5 million. Without a cost segregation study, the annual depreciation deduction would be roughly $128,205 ($5M / 39 years). After a study, it's determined that $1 million of the cost can be reclassified as 5-year personal property and $500,000 as 15-year land improvements. In 2024, the business could take 60% bonus depreciation on this reclassified $1.5 million—an immediate deduction of $900,000 on top of the regular depreciation for the remaining building structure.

Smaller, Practical Strategies

Not every method has to involve six-figure assets. Two practical elections help smaller businesses.

• De Minimis Safe Harbor Election: This rule allows businesses to immediately expense low-cost asset purchases rather than tracking them for depreciation. If you have an Applicable Financial Statement (AFS), such as an audited statement, you can expense items costing up to $5,000. Without an AFS, the limit is $2,500. This is a powerful administrative tool for handling everything from laptops to office chairs without the burden of depreciation schedules.
• MACRS Accelerated Methods: The standard Modified Accelerated Cost Recovery System (MACRS) itself has accelerated methods built in. The most common method for 3-, 5-, 7-, and 10-year property is the 200% Double-Declining Balance (DDB) method, which front-loads deductions compared to the straight-line method. While not as immediate as Section 179 or bonus, it still represents an acceleration and is the default for most non-real estate assets.

Final Thoughts

From Section 179 expensing and bonus depreciation to advanced methods like cost segregation, accelerating depreciation offers a clear path to improving a business's cash flow and tax position. By understanding which tool to use and when, you can turn capital expenditures into strategic financial advantages that support growth and planning.

Navigating the interaction between Section 179 limits, bonus phase-downs, and state law conformity is where the real work begins, consuming hours that could be better spent advising clients. Instead of digging through IRS publications for niche rules or depreciation schedules, Feather AI provides instant, citation-backed answers. Ask a plain-English question about asset eligibility or state-specific IRC conformity and get a clear, sourced response in seconds, allowing you to focus on high-value client strategy, not manual research.