Maximizing Tax Savings with Section 179: A Must-Know for Small Businesses
One of the most impactful tax incentives for businesses is Section 179 of the Internal Revenue Code, commonly referred to as the "Section 179 Deduction." This powerful tax tool can help businesses to immediately write off the cost of certain assets in the year bought, reducing taxable income and freeing up capital for growth. You may have made such a qualifying purchase this year but not know how to take advantage of the savings. This article outlines some key elements of the Section 179 Deduction to make sure you are not missing out.
What is Section 179?
Section 179 allows businesses to deduct the full purchase price of qualifying property acquired and placed in service during the tax year—like equipment, vehicles, or software—immediately, instead of depreciating it over several years. This immediate write-off can make a substantial difference in a company's tax burden, making it a popular choice for small and medium-sized businesses that invest in tangible assets.
For the 2024 tax year, the maximum Section 179 expense deduction is $1,220,000. This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $3,050,000. Also, the maximum Section 179 expense deduction for sport utility vehicles placed in service in tax years beginning in 2024 is $30,500 (IRS, 2024).
What Qualifies?
To qualify for the Section 179 deduction, your property (i) must be eligible property, (ii) must have been acquired for business use, and (iii) must have been acquired by purchase.
“Eligible property” for purposes of Section 179 covers a broad spectrum of property, however the following are common examples of qualifying expenses:
Tangible personal property: This includes equipment, machinery, and certain types of furniture.
Vehicles: Certain business-use vehicles are eligible for Section 179. However, there are restrictions on the deduction limit based on vehicle weight and use.
Business computers and off-the-shelf computer software: This is computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified. It includes any program designed to cause a computer to perform a desired function. However, a database or similar item is not considered computer software unless it is in the public domain and is incidental to the operation of otherwise qualifying software (IRS, 2024).
Improvements to Non-Residential Buildings: Certain building improvements, such as HVAC systems, fire alarms, and security systems, can qualify if they were made to buildings used for business purposes.
Bonus Depreciation: Doubling Down on Savings
If your purchases exceed the Section 179 limit, bonus depreciation can come to the rescue. For 2024, bonus depreciation allows you to deduct 60% of the remaining cost of qualifying property in the same year. Combine this with Section 179 for even larger deductions.
Like the Section 179 deduction, bonus depreciation is a special depreciation allowance equal to a percentage of the cost for certain qualified property acquired after September 27, 2017, and placed in service after December 31, 2023, and before January 1, 2025. The allowance applies only for the first year you place the property in service (IRS, 2024). The allowance is an additional deduction you can take after any section 179 deduction and before you figure regular depreciation for the year you place the property in service.
Section 179 Only
Suppose a small business buys $500,000 worth of new equipment in 2024 which is treated as eligible property under Section 179. Using the Section 179 deduction, it can write off the full $500,000 in the current tax year rather than depreciating it over time. Assuming a 25% tax rate, this deduction could save them $125,000 in taxes, providing an immediate boost to their cash flow.
Section 179 with Bonus Depreciation
The following is an example illustrating the utilization of the Section 179 deduction and bonus depreciation using the 2024 amounts:
Key Considerations
Costs Exceeding $3,050,000 Phase-Out Amount: If the cost of your qualifying section 179 property placed in service in a year is more than $3,050,000, you must generally reduce the dollar limit (but not below zero) by the amount of cost over $3,050,000.
Example: In 2024, Small Business placed in service machinery costing $3,100,000. This cost is $50,000 more than $3,050,000, so Small Business must reduce the dollar limit to $1,170,000 ($1,220,000 − $50,000).
Business Income Limitation: The deduction can only reduce taxable income to zero; it cannot create a loss. Unused deductions can often be carried forward to future years.
Total Cap on Deductions: Even with bonus depreciation, the deduction for the year is capped, so planning the timing of large purchases is essential.
Let Us Help You Save
Navigating the specifics of Section 179 can be challenging, especially when planning significant investments. At Visibility CFO & Tax Advisors we are here to help you maximize your Section 179 deductions and ensure compliance with IRS requirements. Whether you're purchasing new equipment or need guidance on future planning, we’ll help you make the most of this valuable deduction. The right moves now can mean significant savings and a stronger bottom line for your business.
Reference: https://www.irs.gov/publications/p946
