As 2024 nears its end, business owners may ask, “How much equipment do I need to buy by December 31, 2024, to lower my tax bill?” In the past, this was a fairly cut-and-dry answer and easy to calculate. However, the new depreciation rules have taken their toll since bonus depreciation is no longer 100% and the Section 179 deduction is more prevalent.

To help you understand the difference here are some highlights of each:

Section 179 Deduction

  • The maximum Section 179 expense deduction for 2024 is $1,220,000, but this is reduced by the amount of Section 179 property placed in service during the tax year that exceeds $3,050,000.
  • Section 179 is available for tangible personal property (equipment, machines, etc.), specific qualified real property (roofs, HVAC systems, fire sprinklers), and off-the-shelf computer software.
  • The deduction is limited to the taxable income from each pass-through entity, and is also limited to all active trades or businesses reported on an owner’s Form 1040.
  • Section 179 cannot create a net operating loss or drive business income into a loss.
  • Sport utility vehicles are limited to $30,500.
  • Individuals who are married filing separately are considered one taxpayer in terms of the dollar limitations of Section 179.

Bonus Depreciation

  • For property placed in service after December 31, 2023, and before January 1, 2025, bonus depreciation is at 60% of the cost of the property. 
  • Bonus depreciation applies to both new and used property, as does Section 179.
  • Bonus depreciation is available for tangible personal property (equipment, machines, etc.) and real property with a life of 20 years or less, certain computer software, and water utility property.
  • The power of bonus depreciation is the ability to use it on 15-year land improvements and qualified improvement property (QIP).  QIP is an improvement to an interior portion of a non-residential building after it was first placed in service.
  • Bonus depreciation can create or increase a net operating loss. 
  • Unlike Section 179, there are no income limitations on each tax return.
  • Taxpayers can elect out of bonus depreciation by attaching a statement to their tax return.

Ultimately, the Section 179 deduction is more in favor of active business owners, but bonus depreciation is still a viable option. Please contact your advisor at KT for additional information and guidance.