Section 179 and Bonus Depreciation provides significant business tax savings on the purchase of eligible equipment in the first year in which that property is put into service.
Section 179 is a provision in the U.S. tax code that enables businesses to take accelerated depreciation of certain types of property (assets), in the first year in which that property is put into service. This provides greater tax benefits in the first year than depreciating equipment over the course of several consecutive years. The larger first year deduction reduces the amount of taxable income a company makes, thus reducing the business income tax paid in that year.
But to take full advantage of this tax deduction and its companion provision, Bonus Depreciation, you need to understand what equipment qualifies and the limits of the provision.
Bonus Depreciation, known as the 168(k) allowance, allows businesses to write off a large percentage of an eligible asset’s cost in the first year it was purchased. This deduction can be taken in addition to the Section 179 allowance but does have additional restrictions.
For tax year 2024 the Bonus Depreciation write-off has reduced to 60%. In 2022, the Bonus Depreciation write-off percentage was 100%. That decreased to 80% in 2023. It will continue to decrease by an additional 20% each year until 2027 when the rule is scheduled to phase out.
You can use Section 179 and Bonus Depreciation in the same year, but the Section 179 deduction must be taken first.
Not all assets qualify for Section 179 and whether something qualifies for the deduction depends on what it is and how you use it. First, you need to use it for business purposes. In other words, if you buy a truck but only use it for personal use, it wouldn’t qualify for a Section 179 deduction. You also need to put the property into use no later than December 31 of the tax year in which the deduction will be taken.
Here are some items that may qualify as eligible property:
One of the most significant benefits of Section 179 is that you can use it to deduct the costs of both new and used equipment. Used equipment qualifies as long as it is “new to you” and meets the other eligibility requirements.
Additionally, the equipment that qualifies for the deduction is eligible for Section 179 and Bonus Depreciation regardless of whether you purchase it outright (pay cash), or whether you finance the equipment purchase.
There are limitations to the amount that can be deducted using Section 179. For tax year 2024, the maximum amount deductible is $1.22 million. The IRS typically adjusts the limits each year, so the limitation amounts will most likely change for tax year 2025.
Section 179 is actually designed for small to mid-sized businesses, as once total depreciable equipment purchases reach $4.27 million, the deduction no longer applies. If the total company’s equipment purchases exceed $3.05 million the Section 179 deduction decreases dollar for dollar until the total equipment purchases reach $4.05 million. While many small and medium sized businesses may not reach the million dollar plus level of investment, it’s a good idea to understand the limitations.
One vital consideration is that the Section 179 deduction cannot cause a business loss. You can deduct an eligible amount to effectively make your business income zero dollars, but no more than that.
By timing the acquisition of each asset, it’s possible to maximize your tax benefits. In order to qualify in a given tax year, the asset must be put into service by end-of-day December 31 of that tax year.
To see how much you could potentially save on your taxes, use this handy Section 179 Calculator provided by our affiliate company, Commercial Credit Group.
To determine the best options for your business, consult with your tax accountant or tax preparer to evaluate your situation. Keystone Equipment Finance Corp. can help you quickly finance your equipment purchase so you can put it into service by the end of the year and you can fully leverage Section 179’s benefits, whether you purchase new or used units. Reach out today and let us help you acquire the equipment you need to move your business forward.