When your business invests in new assets, taking advantage of depreciation tax breaks can significantly reduce your taxable income. Two key provisions—Section 179 and first-year bonus depreciation—allow businesses to accelerate deductions, but the rules are changing. Understanding these updates can help you maximize savings and avoid costly mistakes.
Key Depreciation Strategies for 2024-2025
Section 179 Deduction: What You Need to Know
Under Section 179, businesses can fully deduct the cost of qualifying assets in the year they are placed in service, subject to certain limits. Eligible assets include:
- Equipment
- Furniture and fixtures
- Computer hardware and some software
- Vehicles (with limitations)
For tax years beginning in 2025, the Section 179 deduction is capped at $1.25 million, with a phaseout beginning at $3.13 million in total qualifying purchases. These figures are slightly up from $1.22 million and $3.05 million, respectively, in 2024.
Bonus Depreciation: Phasing Out Soon
First-year bonus depreciation allows businesses to deduct a percentage of an asset’s cost in the year it is placed in service. Unlike Section 179, bonus depreciation isn’t subject to business income limits or phaseouts. However, the deduction is gradually decreasing:
- 2024: 60% deduction
- 2025: 40% deduction
- 2026: 20% deduction
- 2027: Eliminated (unless Congress reinstates it)
Given ongoing discussions in Washington, it’s possible that 100% bonus depreciation could return, but businesses should plan based on current law.
How Income Affects Your Deduction
The Section 179 deduction cannot create a business loss—it’s limited to your net taxable income. This includes:
- Wages and compensation
- Business profits
- Net rental income
- Net proceeds from selling business assets
If your income limitation prevents you from taking the full Section 179 deduction, you can:
- Carry forward the disallowed amount to future tax years
- Use bonus depreciation to offset taxable income (since it’s not subject to the same limitations)
Example: Using Both Section 179 and Bonus Depreciation
In 2024, Jim’s C corporation purchases and places $500,000 of qualifying assets in service. However, due to the business income limitation, the company can only claim $300,000 under Section 179.
To maximize tax benefits, the company applies first-year bonus depreciation (60% of the remaining $200,000), resulting in an additional $120,000 deduction.
Total 2024 deductions:
- $300,000 (Section 179 deduction)
- $120,000 (Bonus depreciation)
- $420,000 total write-off (with only $80,000 left for future depreciation)
If Jim’s business had no income limitation, the entire $500,000 could have been deducted using Section 179 alone.
Final Thoughts: Consult a Tax Advisor
Navigating depreciation rules can be complex, especially as bonus depreciation phases out. A well-planned strategy can lead to substantial tax savings while avoiding common pitfalls. Before making asset purchases, consult your tax advisor to develop a plan tailored to your business’s financial situation.
The HoganTaylor Tax Practice
If you have any questions about the content of this publication, or if you would like more information about HoganTaylor's Tax practice, please email Tony Otto, Tax Practice Lead, at jotto@hogantaylor.com.
INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.
