When it comes to tax strategies, understanding how to maximize your deductions can be a game-changer for businesses. First-year bonus depreciation and Section 179 expensing. These methods can help you write off significant portions of your asset purchases, reducing your taxable income and saving you money. This article will explain how these work, their benefits, and how to use them effectively.
Table of Contents
What is First Year Bonus Depreciation?
Bonus depreciation is a tax incentive to encourage businesses to invest in new and used assets. Here's what you need to know:
How Does Bonus Depreciation Work?
Bonus depreciation enables you to deduct significant expenses for eligible assets during the initial year of use. Here’s a step-by-step guide:
- Purchase Qualified Property: The asset must be depreciable business property with a recovery period of 20 years or less. This includes machinery, equipment, computers, and specific improvements to non-residential buildings.
- Place the Property in Service: The asset must be put into service in the same tax year you purchased it. For example, if you buy a piece of machinery in December but don't install it until January, you'll claim the depreciation the following year.
- Claim Bonus Depreciation on Your Tax Return: You can write off the allowed percentage of the asset's cost on Form 4562, which is filed with your business tax return.
Current Bonus Depreciation Rates
The bonus depreciation rate has changed over the years. Here’s the current and future rates:
| Year | Bonus Depreciation Rate |
| 2023 | 80% |
| 2024 | 60% |
| 2025 | 40% |
| 2026 | 20% |
| 2027 | 0% |
If you purchase an asset in 2024, you can write off 60% of its cost in the first year.
Example of Bonus Depreciation
Let's say you purchase a piece of machinery for $100,000 in 2024. Here’s how the bonus depreciation would work:
- Bonus Depreciation: 60% of $100,000 = $60,000
- Remaining Depreciable Amount: $40,000
- Total First-Year Deduction: $60,000 (bonus) + $4,000 (regular depreciation) = $64,000
This example shows how you can significantly reduce your taxable income in the first year.
Also Read: Unlocking Tax Secrets and Rates
What is Section 179 Expensing?
Section 179 expensing is another tax deduction that allows businesses to write off the total cost of certain assets in the year they are purchased. Here’s how it works:
How Does Section 179 Expensing Work?
Qualifying Assets: Section 179 applies to tangible depreciable business assets, including equipment, computer hardware, furniture, and most software. It does not apply to real property unless it is a qualified improvement property (QIP).
- Dollar Limits: For tax years beginning in 2024, the maximum Section 179 deduction is $1,220,000. However, this deduction begins to phase out if your total qualified asset additions exceed $3,050,000.
- Business Use Percentage: To qualify for the full deduction, the asset must be used for business at least 50% of the time.
Example of Section 179 Expensing
If your business purchases $1,000,000 worth of qualifying equipment in 2024, here’s how the Section 179 deduction would work:
- Section 179 Deduction: You can deduct up to $1,220,000, but since your purchase is $1,000,000, you can deduct the total amount.
- Remaining Depreciable Amount: $0 (since the total amount is deducted)
- Total First-Year Deduction: $1,000,000
Section 179 vs Bonus Depreciation
Section 179 and bonus depreciation allow you to write off asset costs quickly, but there are key differences:
| Feature | Section 179 | Bonus Depreciation |
| Dollar Limits | $1,220,000 (phases out at $3,050,000) | No Limits |
| Asset Types | Tangible depreciable business assets | Tangible depreciable business assets |
| Business Uses | Must be used for business at least 50% | Must be used for business at least 50% |
| Depreciation rate | The full amount in the first year | 60% in 2024 (phasing down to 0% by 2027) |
| Optional | Yes | Yes |
| Used Assets | Yes, but limited to specific conditions | Yes, if new to the taxpayer |
Also Read: Federal Income Tax: How is Your Tax Calculated
How to Coordinate Section 179 and Bonus Depreciation
To maximize your tax savings, it's crucial to understand how to use these two deductions together.
Step-by-Step Guide
- Calculate Your Section 179 Deduction: Determine the maximum amount you can deduct under Section 179 based on your asset purchases and the dollar limits.
- Calculate Your Bonus Depreciation: Calculate the bonus depreciation based on the current rate for the remaining amount not covered by Section 179.
- Combine the Deductions: Add the Section 179 and bonus depreciation deductions to get your total first-year deduction.
Example of Coordination
Let's say your business purchases $1,500,000 worth of qualifying assets in 2024:
- Section 179 Deduction: $1,220,000 (maximum allowed)
- Remaining Depreciable Amount: $280,000 ($1,500,000 - $1,220,000)
- Bonus Depreciation: 60% of $280,000 = $168,000
- Regular Depreciation: 5-year property, approximately $22,400
- Total First-Year Deduction: $1,410,400 ($1,220,000 + $168,000 + $22,400)
This combination can result in significant tax savings, as shown in the example.
Do I Have to Take Bonus Depreciation?
No, bonus depreciation is not mandatory. If your business suits the MACRS (Modified Accelerated Cost Recovery System) depreciation method better, you can use it instead.
How Does Bonus Depreciation Impact My Taxable Income?
Bonus depreciation can significantly reduce your taxable income in the first year, leading to substantial tax savings. For example, deducting $60,000 from a $100,000 asset will reduce your taxable income by $60,000.
Can I Use Section 179 and Bonus Depreciation for the Same Asset?
Yes, you can use both for the same asset. Start by maximizing your Section 179 deduction, then apply bonus depreciation to the remaining amount.
What Assets Qualify for Bonus Depreciation?
Tangible personal property with a recovery period of 20 years or less, such as machinery, equipment, computers, and specific improvements to non-residential buildings, qualify. Used assets that are new to the taxpayer also qualify.
How Does the Phase-Out of Bonus Depreciation Affect My Business?
As the bonus depreciation rate decreases over the years, it's wise to frontload your capital expenditures to take advantage of higher depreciation rates while they are available. For example, purchasing assets in 2024 will give you a 60% bonus depreciation rate, higher than the 40% rate in 2025.
What is the difference between bonus depreciation and regular depreciation?
Bonus depreciation allows you to write off a more significant portion of the asset's cost in the first year than regular depreciation, which spreads the cost over the asset's useful life.
Can I use bonus depreciation for real estate?
No, bonus depreciation does not apply to real estate such as commercial or residential buildings. However, it can apply to tangible personal property within these buildings.
How does bonus depreciation impact businesses with net losses?
Even if your business has a net loss, you can still deduct the cost of new equipment and carry forward the loss. This can help you offset future taxable income.
Profitjets: Simplifying Complex Tax Strategies
At Profitjets, we understand the complexities of bonus depreciation and Section 179 expensing, and we're here to help you navigate these regulations and maximize your tax benefits. Our team of expert accountants and tax professionals can:
- Assess Your Eligibility: We'll analyze your business and asset purchases to determine which deductions you qualify for.
- Optimize Your Deductions: We'll help you coordinate Section 179 and bonus depreciation to ensure you take advantage of every tax break.
- Prepare Accurate Tax Filings: We'll prepare and file your tax returns, ensuring accuracy and compliance.
- Provide Ongoing Support: We'll be your trusted advisor, answering your questions and keeping you updated on any changes to tax laws.
By partnering with Profitjets, you can have peace of mind knowing that your tax obligations are handled with expertise through our tax services, ensuring you're maximizing your financial savings.
In addition to our tax services, Profitjets also offers bookkeeping services and CFO services to provide comprehensive financial support, helping you manage your finances effectively and drive business growth.
Conclusion
Understanding and leveraging first year bonus depreciation and Section 179 expensing can greatly benefit your business. Maximizing these deductions can significantly reduce taxable income and save thousands of tax dollars.
By staying informed and effectively leveraging these tax strategies, you can ensure your business is in the best financial position possible.
