When you buy an asset that provides value over the course of a year, you may need to capitalize the asset and claim depreciation expense over the useful life of the asset. However, sometimes it makes more sense to claim accelerated depreciation. This simply means that you claim more depreciation expense in the year of the purchase.
Yes, it’s perfectly legal, and the IRS provides two avenues to maximize this accelerated depreciation: Section 179 and Bonus Depreciation.
Section 179 and Bonus Depreciation are two popular deductions that let you claim up to 100 percent of your asset’s cost the first year you purchase and start using the asset. So, which one should you choose? That’s a complex question.
For the end of 2024, several important updates and considerations about Bonus Depreciation and Section 179 should be on your radar. Here’s what’s new and relevant to help you make informed decisions:
Key Updates for Bonus Depreciation in 2024
Phase-Out Reduction
• Bonus depreciation continues its phased reduction under the Tax Cuts and Jobs Act (TCJA). For 2024, the allowable bonus depreciation rate is 60% of an asset’s cost, down from 80% in 2023.
• This gradual reduction means businesses will have less ability to fully expense assets in their first year of purchase through bonus depreciation.
Qualified Property Eligibility
• Bonus depreciation still applies to qualified business property with a useful life of 20 years or less, including machinery, equipment, and certain improvements like roofs or HVAC systems.
• Used property also qualifies if purchased new to the business.
Immediate Tax Planning Implications
• Businesses accustomed to claiming 100% bonus depreciation in prior years will need to adjust forecasts and plan for the reduced deduction in 2024.
Key Updates for Section 179 in 2024
Increased Deduction Limits
• Section 179 limits are adjusted annually for inflation. The deduction limit and capital acquisition limit are expected to be slightly higher than 2023’s thresholds:
• Deduction limit (2023): $1,160,000
• Capital acquisition limit (2023): $2,890,000
• For 2024, check the updated limits, as exceeding the acquisition cap still reduces the deduction dollar-for-dollar.
Flexibility in Asset Usage
• Section 179 continues to offer more flexible eligibility, allowing businesses to expense assets used at least 50% for business purposes. Unlike bonus depreciation, it can be limited to avoid creating a tax loss.
Strategic Considerations for 2024
Planning Around the Phase-Out
• With bonus depreciation reduced to 60%, businesses might rely more on Section 179 for immediate expensing, especially for smaller purchases or assets that don’t meet bonus depreciation requirements.
Balancing Cash Flow and Long-Term Value
• If you’re considering selling your business soon, overusing accelerated depreciation can lower the book value of assets, potentially affecting valuations. Consult a tax professional to strike a balance.
Combining Section 179 and Bonus Depreciation
• Using both deductions can be beneficial for qualifying assets, but it requires a detailed review of income, spending, and future growth plans. For example:
• Use Section 179 to reduce taxable income while keeping bonus depreciation for larger assets exceeding Section 179’s thresholds.
Leasehold and Business Improvements
• Certain leasehold improvements and small-dollar assets may be better suited for Section 179 expensing in 2024, especially as bonus depreciation percentages decline.
Additional Insights
• Impact of Bonus Depreciation Phase-Out on Small Businesses: The reduction in bonus depreciation percentage may hit smaller businesses harder as they may no longer achieve the same immediate tax relief they enjoyed under the 100% allowance.
• Future of Tax Legislation: The scheduled phase-out of bonus depreciation by 2027 could prompt Congress to re-evaluate and potentially introduce new tax provisions or extend existing ones.
Recommendations for End-of-Year Tax Planning
• Review Spending Plans: Evaluate whether you need to make significant asset purchases in 2024 to take advantage of the remaining 60% bonus depreciation.
• Model Scenarios: Work with a tax professional to simulate tax outcomes for using Section 179, bonus depreciation, or a combination of both.
• Prepare for Future Adjustments: Anticipate the continued reduction of bonus depreciation and explore other tax strategies to maximize deductions in upcoming years.
With these changes in mind, a proactive tax strategy is critical to make the most of available deductions while aligning with your business goals.
What Is Bonus Depreciation?
Bonus depreciation is an accelerated depreciation method currently allowing 100% depreciation expense in the year of the purchase.
After January 1, 2023, the IRS is phasing bonus depreciation to:
- 80 percent in 2023
- 60 percent in 2024
- 40 percent in 2025
- 20 percent in 2026
Why did the IRS start bonus depreciation? It was part of the Tax Cuts and Jobs Act of 2017 (TCJA), which was designed to stimulate business investments (and business in general).
You can take the bonus depreciation deduction as long as you meet the following criteria:
- The asset is “qualified business property” with a useful life of 20 years or less
What Is Section 179?
Section 179 has been an option for decades. Simply put, Section 179 allows you to claim up to 100% of the costs of an asset in its year of purchase instead of claiming depreciation over the useful like of the asset. There are limits, though.
- Section 179 only applies to certain assets. They must be:
– Tangible
– Purchased (not leased)
– Used at least 50 percent for business
– Not acquired from a relative (Sorry, Grandma’s old Cadillac doesn’t qualify.) - You can’t claim a loss. If you only made $50,000 in net income, you can’t claim $100,000 in Section 179 deductions.
- There are spending limits and deduction limits. In 2021, these are:
– Capital acquisition limit: $2,620,000
– Section 179 depreciation limit: $1,050,000
If you exceed the purchase threshold, the deduction threshold is also reduced dollar for dollar by the same amount.
Can You Claim Both Bonus Depreciation and Section 179?
Yes, you can claim both for qualifying assets. Should you claim both? That depends on a lot of factors.
Unfortunately, no one can say whether you should claim Bonus Depreciation, Section 179, or both without first reviewing your finances. There are many, many ways to claim the two deductions, and frankly, there’s a lot of math involved.
For example, we might recommend claiming both for one client who needs the tax savings this year. Things are looking up for her business, but she needs some extra cash now. Her assets are eligible for both deductions, so she claims both and gets 100 percent of the cost of her assets in total deductions.
But then we might have another client with a much more complicated situation. He exceeds the Section 179 threshold for purchases and is planning to sell his business soon. He could still claim a lot of accelerated depreciation, but that would bring the book value of his assets down. This wouldn’t look great to potential buyers. So there’s a little more to consider in his situation.
Learn more about the differences between Section 179 and Bonus Depreciation with our infographic below:
Talk to the Nerds to see what option is best for you!
If you want to figure out which deduction is best for your business, you’ll need to look at the whole picture, examine your financial projections and business goals for the next few years and crunch the numbers. Or, you can always give your CPA Nerd a call for help. The number is 586.468.0200.
Fill out the contact form to have a Nerd contact you directly. While you wait, download the handy infographic for your reference. We look forward to hearing from you.