Preface: “I have had many anxieties for our commonwealth, principally occasioned by the depreciation of our money.” – Patrick Henry
Accelerated Depreciation Rules for 2024: A Comprehensive Guide
Depreciation is an essential concept for businesses when it comes to managing assets and maximizing tax savings. In 2024, accelerated depreciation rules continue to play a critical role in providing tax relief by allowing businesses to write off the cost of capital assets more quickly than under traditional depreciation methods. This results in reduced taxable income in the earlier years of an asset’s life, improving cash flow for businesses.
This blog explores the accelerated depreciation rules for 2024, with a particular focus on key provisions such as Bonus Depreciation and Section 179 Expensing. By understanding how these rules work, businesses can make strategic decisions on purchasing equipment, property, and other capital assets.
1. What is Accelerated Depreciation?
Accelerated depreciation allows businesses to deduct a larger portion of an asset’s cost in the earlier years of its useful life. This is in contrast to straight-line depreciation, where the cost is spread evenly over the asset’s life. Accelerated depreciation can offer significant tax advantages by reducing taxable income in the short term.
The two main methods of accelerated depreciation used in the U.S. tax system are Bonus Depreciation and Section 179 Expensing, both of which allow businesses to deduct significant amounts of the cost of assets in the year they are placed in service.
2. Bonus Depreciation in 2024
One of the most impactful provisions of the Tax Cuts and Jobs Act (TCJA) was the expansion of Bonus Depreciation, which allows businesses to deduct a significant portion of the cost of qualified property in the first year of service.
Under current rules, Bonus Depreciation has been set at 60% for 2024, which represents a reduction from the 100% level available in 2022. This means that businesses can immediately deduct 60% of the cost of eligible assets in the year they are purchased and put into service, with the remaining 20% depreciated over the asset’s useful life.
What Qualifies for Bonus Depreciation?
To qualify for Bonus Depreciation, a property must meet specific criteria:
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- The property must be new or used (as long as it’s the first time the asset is used by the taxpayer).
- Eligible property includes tangible personal property such as machinery, equipment, computers, furniture, and certain building improvements.
- The asset must have a useful life of 20 years or less. This includes equipment, vehicles, and office furniture, but excludes most buildings.
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Key Changes for 2024
The phased reduction of Bonus Depreciation continues, with the rate set to decline to 40% in 2025. This gradual decrease emphasizes the importance of timing for businesses planning major purchases. Accelerating capital investments in 2024 could help businesses take advantage of the higher deduction rate before it drops further.
3. Section 179 Expensing
Another essential provision that works alongside Bonus Depreciation is Section 179 Expensing. Under Section 179, businesses can elect to deduct the full cost of qualifying equipment and software in the year the asset is purchased and placed in service, up to a certain limit.
Section 179 Limits for 2024
For 2024, the maximum deduction businesses can take under Section 179 is expected to be around $1.22 million, with a phase-out threshold of $3.050 million. This means that businesses can immediately expense up to $1.22 million of qualifying property, but if the total cost of qualifying property exceeds $3.050 million, the amount eligible for deduction begins to phase out dollar for dollar.
What Qualifies for Section 179?
To be eligible for Section 179 Expensing, the property must be tangible and used in business. Some examples include:
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- Equipment and machinery used for business purposes
- Computers and office furniture
- Software (off-the-shelf)
- Certain improvements to nonresidential property, such as HVAC systems, fire protection, and alarm systems
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One major benefit of Section 179 is that it allows businesses to take the deduction for both new and used property. Additionally, businesses have more flexibility with Section 179 because it is an election they can choose to make, unlike Bonus Depreciation which is automatic.
4. The Interaction Between Bonus Depreciation and Section 179
While Bonus Depreciation and Section 179 can both provide substantial tax savings, businesses need to understand how they interact. Section 179 is generally applied first, allowing businesses to immediately expense up to the limit. After the Section 179 deduction, Bonus Depreciation can be applied to the remaining eligible basis of the property.
For example, if a business purchases $1.5 million worth of equipment in 2024, it can deduct $1.22 million using Section 179, and then apply Bonus Depreciation to the remaining $280,000. With 60% Bonus Depreciation, the business can deduct an additional $168,000, leaving only $112,000 to be depreciated over time.
5. Key Considerations for Businesses
Businesses looking to invest in capital assets in 2024 should carefully consider the timing of their purchases to maximize their tax benefits. With Bonus Depreciation set to phase down in future years, and Section 179 thresholds changing with inflation, 2024 represents an important year to take advantage of accelerated depreciation options.
It’s also important to note that while accelerated depreciation provides immediate tax relief, it reduces future depreciation deductions. Businesses need to weigh the benefits of short-term tax savings against long-term planning considerations.
Conclusion
Accelerated depreciation rules for 2024 offer businesses the opportunity to reduce their tax burden and increase cash flow by expensing a large portion of capital investments in the year they are purchased. By understanding the mechanics of Bonus Depreciation and Section 179, businesses can strategically plan their asset purchases to optimize tax savings. As always, consulting with a CPA or tax professional is recommended to ensure compliance with the latest regulations and to make the best use of these provisions.