The strategy for effective tax planning starts with accelerating deductions and deferring income. Section 179 deductions and bonus depreciation on newly acquired assets are valuable to achieving this goal which allows businesses to maximize their deductions in the current year.
By taking advantage of Sec. 179 and bonus depreciation, your business can take substantial tax write-offs on your qualifying asset expenses.
Difference Between Sec. 179 and Bonus Depreciation
Making the right tax planning decisions can be impacted by Sec. 179 and bonus depreciation. For example, there are more criteria involved when taking the Sec. 179 expense than there is for bonus depreciation.
Each state has different rules for Sec. 179 and bonus depreciation. For instance, Ohio allows $25,000 of 179 expenses each year but does not allow bonus depreciation. Excess 179 expense and bonus depreciation must be added back for Ohio tax purposes and deducted over time, generally 5 years.
For flow-through entities, there are more limits for Sec. 179 deductions at the individual taxpayer level when considering all businesses the individual owns, whereas bonus depreciation does not have this restriction.
Section 179 can allow for potential deductions of the entire cost of an eligible asset, but bonus depreciation only allows for a percentage, such as 60% in 2024. In 2025, 2026, and 2027, the bonus depreciation rates decrease to 40%, 20% and 0% respectively. However, Sec. 179 will still be available in these years.
Another determining factor is the limit on deductions. The larger the business, the less you can take for Sec. 179. If asset additions each year exceed a certain amount, your total 179 deduction is phased out dollar for dollar (this amount is $3.05 million for 2024). However, for bonus depreciation, a business can claim it no matter their size or amount of additions.
There is also no limit to the amount of bonus depreciation you can take in a year. For example, Sec. 179 is limited to $1.22 million in 2024, with the amount adjusted for inflation each year.
Understanding the differences between Sec. 179 and bonus depreciation is critical to making the right tax planning decisions that effectively maximize deductions while complying with state and federal regulations. Focusing on what matters most to your business’s tax planning is essential to complying with state and federal law regulations.
Reach out to 415 Group today if your business needs assistance with maximizing your deductions.
Your business should generally maximize current year depreciation write-offs for newly acquired assets. Two federal tax breaks can be a big help in achieving this goal: first-year Section 179 depreciation deductions and first-year bonus depreciation deductions. These two deductions can potentially allow businesses to write off some or all of their qualifying asset expenses in Year 1. However, they’re moving targets due to annual inflation adjustments and tax law changes that phase out bonus depreciation. With that in mind, here’s how to coordinate these write-offs for optimal tax-saving results.
Sec. 179 deduction basics
Most tangible depreciable business assets — including equipment, computer hardware, vehicles (subject to limits), furniture, most software and fixtures — qualify for the first-year Sec. 179 deduction.
Depreciable real property generally doesn’t qualify unless it’s qualified improvement property (QIP). QIP means any improvement to an interior portion of a nonresidential building that’s placed in service after the date the building is placed in service — except for any expenditures attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework. Sec. 179 deductions are also allowed for nonresidential building roofs, HVAC equipment, fire protection systems and security systems.
The inflation-adjusted maximum Sec. 179 deduction for tax years beginning in 2024 is $1.22 million. It begins to be phased out if 2024 qualified asset additions exceed $3.05 million. (These are up from $1.16 million and $2.89 million, respectively, in 2023.)
Bonus depreciation basics
Most tangible depreciable business assets also qualify for first-year bonus depreciation. In addition, software and QIP generally qualify. To be eligible, a used asset must be new to the taxpayer.
For qualifying assets placed in service in 2024, the first-year bonus depreciation percentage is 60%. This is down from 80% in 2023.
Sec. 179 vs. bonus depreciation
The current Sec. 179 deduction rules are generous, but there are several limitations:
- The phase-out rule mentioned above,
- A business taxable income limitation that disallows deductions that would result in an overall business taxable loss,
- A limited deduction for SUVs with a gross vehicle weight rating of more than 6,000 pounds, and
- Tricky limitation rules when assets are owned by pass-through entities such as LLCs, partnerships, and S corporations.
First-year bonus depreciation deductions aren’t subject to any complicated limitations. But, as mentioned earlier, the bonus depreciation percentages for 2024 and 2023 are only 60% and 80%, respectively.
So, the current tax-saving strategy is to write off as much of the cost of qualifying asset additions as you can with Sec. 179 deductions. Then claim as much first-year bonus depreciation as you can.
Example: In 2024, your calendar-tax-year C corporation places in service $500,000 of assets that qualify for both a Sec. 179 deduction and first-year bonus depreciation. However, due to the taxable income limitation, the company’s Sec. 179 deduction is limited to only $300,000. You can deduct the $300,000 on your corporation’s 2024 federal income tax return. You can then deduct 60% of the remaining $200,000 ($500,000 − $300,000), thanks to first-year bonus depreciation. So, your corporation can write off $420,000 in 2024 [$300,000 + (60% x $200,000) = $420,000]. That’s 84% of the cost! Note that the $200,000 bonus depreciation deduction will contribute to a corporate net operating loss that’s carried forward to your 2025 tax year.
Manage tax breaks
As you can see, coordinating Sec. 179 deductions with bonus depreciation deductions is a tax-wise idea. We can provide details on how the rules work or answer any questions you have.
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