Optimizing Sec. 179 Tax Deductions Alongside Bonus Depreciation
Posted by Kristin Re’ on March 25, 2024
When it comes to maximizing current year depreciation write-offs for newly acquired assets, businesses can benefit from two key federal tax breaks: first-year Section 179 depreciation deductions and first-year bonus depreciation deductions. These deductions offer the potential to write off qualifying asset expenses in Year 1, providing significant tax-saving opportunities. However, given their changing nature due to annual inflation adjustments and evolving tax laws, it's crucial to coordinate these deductions effectively to achieve optimal results.
Understanding Sec. 179 Deductions
The first-year Sec. 179 deduction applies to most tangible depreciable business assets, such as equipment, computer hardware, vehicles (with limitations), furniture, software, and fixtures. Generally, depreciable real property doesn't qualify, except for qualified improvement property (QIP), which includes certain interior improvements to nonresidential buildings. Inflation-adjusted, the maximum Sec. 179 deduction for tax years starting in 2024 is $1.22 million, with phase-out beginning if qualified asset additions exceed $3.05 million.
Insight into Bonus Depreciation
Similarly, most tangible depreciable business assets and QIP qualify for first-year bonus depreciation. Used assets must be new to the taxpayer to be eligible. For assets placed in service in 2024, the first-year bonus depreciation percentage is 60%, down from 80% in 2023.
Coordinating Sec. 179 vs. Bonus Depreciation
While Sec. 179 deduction rules have limitations like phase-out rules and taxable income restrictions, bonus depreciation deductions aren't subject to such complexities. However, the lower bonus depreciation percentages for 2024 (60%) and 2023 (80%) necessitate strategic planning. The current tax-saving approach involves maximizing Sec. 179 deductions first, followed by claiming bonus depreciation.
Illustrative Example
For instance, in 2024, a calendar-tax-year C corporation places $500,000 of qualifying assets into service. Due to the taxable income limitation, the Sec. 179 deduction is limited to $300,000. The corporation can then claim 60% of the remaining $200,000 ($500,000 - $300,000) through first-year bonus depreciation, resulting in a total write-off of $420,000 in 2024, accounting for 84% of the cost.
Effective Management of Tax Breaks
Coordinating Sec. 179 deductions with bonus depreciation deductions presents a tax-wise strategy. For detailed insights into how these rules work or for any queries, our team is available to assist you.
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As a principal in our tax department, Kristin serves businesses and individuals. She works primarily with commercial entities in a variety of industries, including Partnerships, S-Corporations, and C-Corporations. She has also worked extensively with manufacturers and start-up companies. Kristin helps companies obtain various tax incentives to reduce tax liability and improve cash flow. Her focus is on various federal, state, and local business development incentives, including Start-Up New York, Excelsior Jobs Program, New York State Film Tax credits, and Federal Research and Development tax credits. She is involved with Firm recruitment and hiring, is a member of the Lumsden Manufacturing team, and serves as co-chair of the Firm R&D tax credit department.