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Maximizing Tax Savings: Coordinating Section 179 and Bonus Depreciation Deductions for Your Business

Your business should aim to maximize depreciation write-offs for newly acquired assets in the current year. Two key federal tax breaks can assist in achieving this objective: first-year Section 179 depreciation deductions and first-year bonus depreciation deductions. These deductions offer the opportunity for businesses to potentially write off a portion or all of their qualifying asset expenses in the first year. However, they are subject to annual inflation adjustments and changes in tax laws, particularly regarding the phase-out of bonus depreciation. Thus, it's essential to coordinate these write-offs effectively for optimal tax savings.

Section 179 deduction basics:

Most tangible depreciable business assets qualify for the first-year Section 179 deduction, including equipment, computer hardware, vehicles (within limits), furniture, most software, and fixtures.

Depreciable real property typically doesn’t qualify unless it meets the criteria of qualified improvement property (QIP), such as certain interior improvements to nonresidential buildings. The maximum Section 179 deduction for tax years starting in 2024 is $1.22 million, with a phase-out beginning if qualified asset additions exceed $3.05 million.

Bonus depreciation basics:

Most tangible depreciable business assets, along with software and QIP, also qualify for first-year bonus depreciation, provided they are new to the taxpayer.

For assets placed in service in 2024, the first-year bonus depreciation percentage is 60%, down from 80% in 2023.

Section 179 vs. bonus depreciation:

While Section 179 deduction rules are favorable, they come with limitations such as the phase-out rule, business taxable income limitation, and restrictions on certain types of assets, particularly for pass-through entities.

Bonus depreciation deductions, on the other hand, aren't subject to complicated limitations, but the percentage available is lower compared to previous years.

The current tax-saving strategy involves maximizing Section 179 deductions first, followed by claiming first-year bonus depreciation to write off as much of the qualifying asset costs as possible.

Example: If your calendar-tax-year C corporation in 2024 places $500,000 worth of assets in service eligible for both Section 179 and first-year bonus depreciation, but due to limitations, the Section 179 deduction is capped at $300,000, you can then utilize first-year bonus depreciation to deduct 60% of the remaining $200,000. This results in a total write-off of $420,000 in 2024, contributing to potential corporate net operating losses carried forward to future tax years.

Contact Us:

Coordinating Section 179 and bonus depreciation deductions strategically is advisable for maximizing tax savings. Feel free to reach out by scheduling a meeting with your VAAS Tax Consultant. We look forward to working with you.


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