Tax-saving benefits are generally available when your business puts newly acquired qualifying assets into service. Under Section 179 of the tax code, companies can take substantial depreciation deductions, subject to various limits adjusted annually for inflation.
Another potential write-off is for first-year bonus depreciation. Like the Sec. 179 deduction, bonus depreciation is subject to limits that change annually. But the limits are going down rather than up. And under the Tax Cuts and Jobs Act, bonus depreciation is scheduled to disappear after 2026.
Basics You Need to Know
Most tangible depreciable assets, such as equipment, furniture and fixtures, computer hardware, and some software, qualify for the Sec.179 deduction in the year you purchase and place them in service. Vehicles also qualify, but they’re subject to additional limitations.
For tax years beginning in 2025, the Sec. 179 deduction maxes out at $1.25 million and begins to phase out when total qualifying assets exceed $3.13 million (up from $1.22 million and $3.05 million, respectively, for 2024).
For qualifying assets placed in service in 2025, first-year bonus depreciation drops to 40% (from 60% in 2024). This figure is scheduled to drop to 20% for 2026 and to be eliminated in 2027. However, Congress may restore it to 100% before then.
How Income Affects Your Deduction
Under tax law, a Sec. 179 deduction can’t result in an overall business taxable loss. So, the deduction is limited to your net aggregate taxable income from all your companies. This includes wages and other compensation, your net business income, net proceeds from selling business assets, and possibly net rental income.
If the business income limitation reduces your Sec. 179 deduction, you can carry forward the disallowed amount or use first-year bonus depreciation. Unlike Sec. 179, bonus depreciation isn’t subject to dollar limits or phaseouts.
Sec. 179 Deductions, First-Year Bonus Depreciation or Both?
You may still be undecided about the best tax-saving strategy for assets you purchased and placed in service in 2024. Here’s an example that combines two methods:
In 2024, a calendar-tax-year C corporation purchased and placed in service $500,000 of assets that qualify for the Sec. 179 deduction and first-year bonus depreciation. However, due to the taxable income limitation, the company’s Sec. 179 deduction is limited to $300,000, which can be claimed on the corporation’s federal income tax return.
The company can deduct 60% of the remaining $200,000 using first-year bonus depreciation ($500,000 minus $300,000). So, the write-offs for the year include 1) a Sec. 179 deduction of $300,000 and 2) $120,000 of bonus depreciation (60% of $200,000). Thus, the company achieves $420,000 in write-offs on its 2024 tax return, leaving only $80,000 to depreciate in future tax years. (Note: If the business income limitation didn’t apply, the company could have written off the entire amount under the Sec. 179 deduction rules because its asset additions were below the phaseout threshold.)
Don’t Go It Alone
Depending on the details, you may have a robust depreciation deduction for 2024 and possibly depreciation to carry forward in 2025. However, maximizing the benefits of both depreciation methods can be complex. And it might adversely affect your company’s eligibility for certain other deductions, such as the Section 199A qualified business income deduction for eligible pass-through businesses. So, don’t go it alone.
Contact the office for help devising the optimal tax strategy for your business and staying atop the latest tax law developments.
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