Understanding Section 179 and Bonus Depreciation for Your Business

Section 179 and Bonus Depreciation are valuable tax incentives that can significantly lower your tax bill when purchasing or financing business equipment, including aircraft.

What is Section 179?

Section 179 allows businesses to deduct the full purchase price of qualifying equipment and software bought or financed during the tax year. This deduction encourages businesses to invest in essential equipment by making those purchases more affordable.

How It Works:

• Immediate Deduction: Rather than depreciating equipment costs over several years, Section 179 allows you to deduct the entire cost in the year the equipment is put into service.
• Limits Apply: For the 2024 tax year, the maximum deduction is $1,220,000. If your total equipment purchases exceed $3,050,000, the deduction starts to decrease. Section 179 is also limited to your business income for the year, but if the deduction exceeds your income, it can be carried forward.
• Types of Equipment: Most equipment qualifies, including machinery, vehicles, computers, furniture, and even aircraft used for business purposes. Note that vehicles have specific limits, such as a $30,500 limit for SUVs with a GVW over 6,000 lbs.

Aircraft as Equipment:

• If you purchase an aircraft and use it more than 50% of the time for business, it qualifies under Section 179. You can deduct the cost up to the limit in the year it is bought and put into service.

Example: If a business buys a small aircraft for $1,000,000 and uses it 80% for business travel, it can deduct $800,000 in the same tax year, adjusted for personal use, reducing taxable income and resulting in tax savings.

Section 179 is designed to encourage businesses to invest in equipment and technology by providing immediate tax relief.

What is Bonus Depreciation?

Bonus Depreciation allows businesses to deduct a large percentage of the cost of eligible assets in the year they are purchased and put into service. It is similar to Section 179 but has key differences:

How Bonus Depreciation Works:

• Deduction Beyond Section 179 Limits: Unlike Section 179, there is no overall limit for bonus depreciation. You can deduct a significant portion of the cost regardless of the total amount spent.
• Immediate Large Deduction: For 2024, you can deduct 60% of the asset’s cost in the first year it’s in service. The remaining 40% is depreciated over its useful life. (This percentage has decreased from 100% in 2023 and may change based on new legislation.)
• New and Used Equipment: Bonus depreciation applies to both new and used equipment, offering flexibility for businesses buying second-hand items.

When It Makes Sense to Use:

• Big Purchases: It’s beneficial for large capital investments that exceed Section 179 limits.
• No Business Income Requirement: Unlike Section 179, bonus depreciation can be claimed even if your business has no taxable income, potentially creating a larger tax loss that can be carried forward.

Example: If you buy a used piece of machinery for $500,000, you could immediately deduct $300,000 (60%) in 2024. The remaining $200,000 would be depreciated over the asset’s useful life.

Key Takeaway:

Bonus Depreciation is a powerful tax tool that allows faster cost recovery and makes it easier to reinvest in business growth.

For detailed information on Section 179 and Bonus Depreciation, contact your tax or legal advisor. You may find more information at IRS website.