Section 179 is a broad class of deductions that small business owners need to know about. Why? Because it provides tax-saving opportunities on vehicles, equipment, office furniture, computers, and off-the-shelf software—and that’s just a start. This deduction offers a more immediate “expense and deduct” option for depreciable business equipment (as opposed to capitalizing and depreciating the asset over time).
Let’s talk about the steps you need to take to maximize the benefits of Section 179 deductions. I mean, of course, reducing what you owe in taxes and keeping more of your money. That’s the goal, and we can make it happen.
Under Section 179, businesses can deduct the cost of qualifying equipment or software the same year they purchase it.
Section 179 deviates from traditional depreciation, which offers tax deductions over an asset’s useful life. Instead, businesses may immediately write off the entire deductible cost of the asset, significantly reducing taxable income in the near term.
Follow the process below to maximize your tax savings.
Step 1: Determine your eligibility for Section 179 tax deductions.
Section 179 deductions apply to a wide range of assets, especially vehicles. Qualifying vehicles or equipment must be purchased and placed into service within the tax year for which the deduction is claimed, so you must plan ahead.
Eligible property or assets must share the following qualities:
- Tangible personal property not permanently affixed to real estate.
- Purchased for business use only.
- Newly acquired as of the current tax year.
- Paid for in full.
Ensuring your property meets these criteria is the foundation for applying Section 179. By carefully selecting and purchasing eligible property, you set the stage for substantial tax savings, which can dramatically alter your company’s tax outlook and improve financial planning.
Step 2: Understand the financial limits and caps of Section 179 deductions.
Section 179 offers valuable tax benefits, but it’s important to understand the limits because deductions are closely tied to the total cost of equipment purchased.
- The deduction limit is $1,220,000 for 2024, up from $1,160,000 in 2023. This substantial cap allows for flexible planning and management of asset acquisitions throughout the year.
- The investment limitation, or purchase cap, for equipment is $3,050,000 for 2024, up from $2,890,000 in 2023. When the cost of section 179 property exceeds the $3,050,000 threshold, deductions decrease dollar-for-dollar. Keep this in mind when planning large-scale investments.
- Your tax savings can’t exceed your taxable income. If they do, the result is to create a net loss, but you can carry forward any unused deductions.
Attention to detail is foundational in strategic tax planning, so stay on the numbers
Step 3: Identify and classify business vehicles that qualify based on Gross Vehicle Weight Rating (GVWR).
Qualifying vehicles must have a Gross Vehicle Weight Rating (GVWR) of 6,000 pounds or more and be of legitimate use to your business to qualify. Business vehicle deductions are one of the most lucrative tax-saving opportunities under Section 179 deductions. Again, every number matters, so keep track of changes when you account for business vehicles because every penny spent matters.
What is GVWR?
GVWR refers to a vehicle’s maximum safe operating weight plus the weight of passengers, fuel, and cargo. The rating is typically found on the manufacturer’s label located on the inside edge of the driver’s side door.
Vehicles that qualify for a full deduction include the following:
- Vehicles designed to transport cargo.
- Certain passenger vans and shuttle buses that seat at least nine, plus the driver
Heavy vehicles with a GVWR greater than 6,000 pounds, including SUVs and trucks, qualify for partial deductions.
Step 4: Leverage bonus depreciation.
Once you’ve tapped into the benefits of section 179 and deducted as much as possible, move on to bonus depreciation for additional tax savings. Right now, bonus depreciation is down from previous years at a rate of 60% for qualifying assets you’ve acquired and placed into service between January 1, 2024 and December 31, 2024. However, bonus depreciation now includes used equipment, so long as it’s new for your business, it’s new.
What’s great about bonus depreciation is how it works hand-in-hand with section 179. Think of section 179 as your first line of defense against a high tax bill, with bonus depreciation waiting in reserve.
Step 5: Calculate your potential deductions for qualifying business vehicles.
Now that we’ve covered which vehicles qualify and how to integrate bonus depreciation, let’s apply this knowledge by making three calculations.
- Identify your qualifying vehicle’s purchase price (or difference after trade-in).
- Determine the percentage of the time the vehicle is used for business purposes.
- Apply the cost of the vehicle (adjusted for business use) against the current year’s section 179 deduction limit ($1,220,000 for 2024).
These limits are cumulative for all qualifying assets, so include any other Section 179 property you’re deducting this year. The remaining basis can be fully deducted in the first year through bonus depreciation, leading to more tax savings.
Step 6: Plan your purchases and tax strategy proactively.
To maximize their Section 179 deductions, business owners must be intentional about what they purchase and why. Items may benefit business operations and employee performance and will be deducted from gross taxable income, but money spent is money spent. Remember your cash flow.
- Plan purchases in line with cash flow cycles.
- Track and account for purchases.
- Seek regular advice from a tax professional.
Follow these steps to prepare your business to fully leverage Section 179’s financial benefits.
Step 7: Work with an aggressive and modern CPA Firm.
Complexity is opportunity. It creates room for creative tax solutions, and when you get tax-efficient, you lower the cost of doing business. That clears the way for growth. Let’s get started.
Schedule a discovery call with me today, and we’ll see if we’re the right fit.
Talk soon,
Jeremy A. Johnson, CPA