Maximizing your Deductions on your Tool Purchases: Section 179 and Bonus Depreciation.
Businesses have valuable tax-saving opportunities under Section 179 and Bonus Depreciation. Section 179 allows full expensing of qualifying equipment and software, with limits for 2024 set at $1,220,000, and a phase-out beginning at $3,050,000. Bonus Depreciation, which allows an additional first-year deduction, is now 60% for 2024, down from 80% in 2023.
What Is Section 179?
Section 179 allows businesses to deduct the full purchase price of qualifying equipment and software during the year it’s purchased. The Tax Cuts and Jobs Act (TCJA) increased the deduction limits, with 2024’s maximum set at $1,220,000 and phase-out starting at $3,050,000. This means that businesses can deduct the cost of their purchases immediately rather than over several years, making it a favorable option for small and mid-sized companies.
What kind of Tools and Equipment qualify?
How Has Section 179 Changed?
Before the TCJA, the maximum deduction for Section 179 was much lower, capped at $500,000 with a phase-out threshold at $2 million. The new law nearly doubled these amounts. While these higher limits remain in place for 2024, it’s important to note that purchases exceeding $4.27 million don’t qualify for any Section 179 deduction.
What Is Bonus Depreciation?
Bonus Depreciation provides an additional first-year deduction for business equipment beyond normal depreciation allowances. Unlike Section 179, Bonus Depreciation applies to both new and used equipment and is not subject to an annual limit or phase-out threshold. For 2024, Bonus Depreciation is set at 60% (down from 80% in 2023), meaning businesses can deduct 60% of the cost of eligible equipment after applying Section 179. The phase-down continues in future years, with 40% available in 2025 and 20% in 2026, before being fully phased out in 2027.
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Using Section 179 and Bonus Depreciation Together
Most businesses should take advantage of Section 179 first and apply Bonus Depreciation to any remaining costs. For example, if you spend $3 million on equipment, you can apply Section 179 to the first $1.22 million, followed by Bonus Depreciation on the remaining amount, deducting 60% of the balance.
Sample Deduction Calculation for 2024:
You can take the full deduction THIS YEAR even if you Finance the equipment and pay over time!!!!
Conclusion
With the phased reductions in Bonus Depreciation over the next few years, 2024 presents a key opportunity to maximize deductions for equipment purchases. By combining Section 179 and Bonus Depreciation, businesses can reduce their taxable income significantly, making it essential to plan ahead for any major capital investments. As always consult your own tax professional before making any decisions that could affect your business. Feel free to reach out to any of the industry experts at Cable and Connections for more information!