Main Points
- Business owners, including small business owners, can take bonus depreciation, Section 179 deductions, and depreciation on assets placed into service at the same time.
- Bonus depreciation is scheduled to phase out by 2027.
- Section 179 is limited to $1,220,000 for 2024.
- Depreciation is multifaceted and requires accurate records to utilize safely.
Small business owners have a lot of information to keep track of. Often times, an accountant or bookkeeper can help, but if you’re just starting out with little capital to cover administrative costs such as these, then you’re responsible to maintaining good records if you would like to depreciate assets used in your business. For the 2024 tax year, there are three routes to take deductions. The great news is that these can be used in tandem for assets purchased and placed into use in the tax year.
Let’s first define the tax year and when assets are placed into service. For the 2023 tax year, the start date is January 1st, 2023 through December 31st, 2023. For 2024, it’s January 1st, 2024 through December 31st, 2024; and so on. When you buy an asset, like a computer or a piece of equipment, the IRS is unconcerned about the purchase date and only care about the date the asset was placed into service. They also want to know the basis, that is, they would like to know how much this cost without sales tax. These two values will be used to determine your depreciation, but how do you apply depreciation?
Bonus Depreciation
Since its inception in 2002 through the Job Creation and Worker Assistance Act, businesses could deduct up to 30% of the cost of a qualified asset in the first year of service. The following year, this deduction was raised to 50% of the cost and was maintained through 2019. In 2017, the Tax Cuts and Jobs Act (TCJA) increased this to 100% starting in 2020, with a reduction in benefit (phase-out) of 20% per year until 2026. For 2024 tax filers, that would be 60% of the cost of qualified assets placed into service, 40% for 2025, 20% for 2026, and eliminated for 2027 and following years.
Section 179 Expense Deduction
Does that mean that the remaining 40% of the cost can’t be deducted in 2024? No. The remaining balance can be deducted as a business expense using Section 179, but there are limits. There is a cap of $1,220,000 on the amount of deduction that can be taken using §179 in 2024, and is not considered a lifetime maximum. This deduction begins to phase-out dollar-for-dollar at amounts beyond the threshold until the depreciation value reaches zero. This is a larger concern for businesses purchasing larger equipment placed into service during the year that have higher price tags like fleets, earth movers, and transportation vehicles like buses and airplanes, as some examples.
For example, heavy sport utility vehicle costs can be depreciated using §179, but only up to $30,500, and it requires the remaining costs are depreciated in the following years. In addition, this vehicle must be capable of traveling on standard roadways and weigh 6,000 pounds, but not more than 14,000 pounds. How you determine the empty weight of the vehicle is to find the Gross Vehicle Weight Rating (GVWR) on the inside door jamb in the driver side door¹. This is used to determine the empty weight of the vehicle to qualify it for this deduction. Reporting requires IRS Form 4562 for vehicle depreciation expenses for years following year one, including the basis and date the vehicle was placed into service.
I mentioned heavy SUVs that can benefit from a §179 deduction if the vehicle is over 6,000 pounds. For vehicles under this limit, they’re considered listed property. These vehicles can be potentially used for personal use like a car or truck, so portions of it can be deducted if used for business. Apply caution for motorcycle owners. You can use a motorcycle for business use, however motorcycles typically lack the utility as a business use vehicle and tend to come under more scrutiny by the IRS.
As you can probably imagine, maintaining a working list of your §179 deductions can be cumbersome if you do this on your own. What’s key is how you track this. The simplest way is to maintain a spreadsheet where you record the asset, the depreciation method, its category, its cost basis, and the date the asset was placed into service. When used in combination with bonus depreciation, you will want a separate column for tracking allowable depreciation against an asset’s cost. Maintaining a running list makes tax filing simpler, and this information will be retained in your tax returns from the time you placed assets into service. I covered a general case, but not every asset is treated equally².
Depreciation
Broadly, these are non-cash expenses. These include tangible and intangible property where the asset is depreciated using certain methods (straight-line, modified accelerated cost recovery system) over a period of time. This also includes real estate, but not land. Land does not depreciate, but instead, depletes if you have non-renewable resource extraction activities like oil drilling or deforestation. Few cases involve land depreciation, like improvements on land specific to the function of the property on the land, like French drains. Depreciation allows businesses to take a deduction without affecting the cash. There is a major caveat to consider when taking depreciation: If you were to take your asset out of your business prior to the depreciation timeline, you will need to recapture that depreciation amount as though it were never taken, which can realize a hefty tax burden.
Since COVID, the IRS resources to audit small businesses has reduced, including returns that will be filed in 2024. That’s not to say you can be laissez faire about tracking your business expenses. There are benefits to taking depreciation and deductions on business assets as you operate and grow, but it’s imperative that good recordkeeping is maintained. Working with an accountant or bookkeeper can assist you throughout the year so that accounting doesn’t feel like a second job to you.
Tree City Tax is accepting new clients for the upcoming filing season, including small business returns. You can book a consultation by calling at (330) 539-4231. Small businesses that schedule a consult before the end of the year reduce their likelihood of filing an extension.
- How do I find the gross vehicle weight rating for my Ford, Ford.com: https://www.ford.com/support/how-tos/owner-resources/vehicle-specifications/how-do-i-find-the-gross-vehicle-weight-rating-gvwr/
- Publication 946: How to Depreciate Property (2023), IRS.gov: https://www.irs.gov/publications/p946