The manufacturing industry is capital-intensive, with companies often needing to invest heavily in equipment, machinery and technology to remain competitive. For the 2024 tax year, two tax incentives-Section 179 and Bonus Depreciation-continue to offer businesses valuable opportunities to write off equipment costs, improve cash flow and reduce taxable income. These provisions are important financial tools for manufacturers looking to upgrade equipment, invest in technology or expand their operations while effectively managing their tax liabilities.
Section 179 Deduction Overview
Section 179 of the Internal Revenue Code allows businesses to deduct the cost of certain qualifying property, such as equipment and machinery, in the year it is placed into service rather than depreciating the cost over multiple years. The primary purpose of Section 179 is to encourage businesses to invest in their operations by providing an immediate tax benefit.
For the 2024 tax year, Section 179 offers businesses significant deductions:
- Deduction limit: The maximum deduction available under Section 179 is $1.22 million for 2024, which means businesses can immediately write off up to $1.22 million of qualified purchases.
- Phase-out threshold: The deduction begins to phase out when a business's total equipment purchases exceed $3.05 million. This phase-out means that for every dollar a business spends beyond $3.05 million on qualifying property, the Section 179 deduction is reduced, and is eliminated once total purchases reach $4.27 million.
One thing to note: a company must be profitable to take the Section 179 deduction. Section 179 cannot be used to the full extent if it creates a net loss for the business.
Bonus Depreciation Overview
Bonus Depreciation provides an additional opportunity for businesses to maximize the depreciation deduction for qualifying property. Bonus Depreciation comes into play if the total cost of the equipment purchased exceeds the $1.22 million allowance for Section 179. The Section 179 deduction must be taken before Bonus Depreciation can be applied.
In 2024, businesses can only deduct 60% of the cost of qualifying assets through Bonus Depreciation. This phase-down is part of a gradual reduction that will continue over the next few years, with the percentage dropping to 40% in 2025 and 20% in 2026. It will be phased out in 2027 unless legislative changes occur.
Bonus Depreciation, unlike Section 179, does not have any spending limits or phase-out thresholds, making it particularly advantageous for large manufacturers investing millions of dollars in capital equipment.
Normal Depreciation
Because the Bonus Depreciation allowance has been reduced from 100%, the IRS is allowing "normal" depreciation to apply, in addition to Bonus Depreciation. The normal depreciation allowance only applies if the total of the Section 179 deduction plus the amount of Bonus Depreciation is less than the total cost of the equipment, resulting in a positive remaining adjusted depreciable basis.
Consult with your tax accountant to determine the full extent to which you can apply the various depreciation options. You can calculate potential savings using this Section 179 calculator: commercialcreditgroup.com/section-179-calculator.
Qualifying Property
Manufacturing companies can take advantage of Section 179 by deducting the cost of a wide range of property, including:
1. Machinery and equipment: Items such as production machinery, manufacturing tools, some vehicles for business use and other essential production-related equipment are fully eligible for the deduction. The deduction applies to new and used equipment.
2. Office furniture and technology: Computers, servers, office equipment and other technology used in the day-to-day operation of a manufacturing facility can also qualify.
3. Nonstructural property: Section 179 can also apply to certain improvements made to nonresidential property, such as roofs, HVAC systems, fire protection systems and security systems, provided they are used for business purposes.
If the equipment qualifies as a depreciable asset under Section 168, is used in the operation of the business and is placed into service before the end of the specific tax year, it should be allowed. And it does not matter if you pay for your purchase in cash or finance the equipment.
Strategic Considerations for 2024
Manufacturers should evaluate their capital expenditure and depreciation plans carefully. Timing is important. The equipment must be placed into service before year-end in order to qualify for both Section 179 and Bonus Depreciation for the 2024 tax year. Companies should work closely with tax professionals to ensure compliance with IRS rules and to optimize the use of these deductions for both short-term and long-term benefits.
By effectively leveraging Section 179 and Bonus Depreciation, manufacturing companies can significantly reduce their tax burden, preserve capital, and reinvest in the technology and equipment they need to remain competitive in an ever-evolving market.
"Manufacturers Capital provides equipment loans and leases for most types of metalcutting and fabricating equipment, as well as working capital loans, equipment refinancing and debt consolidation," said Julie Murphy, Vice President-Marketing, Commercial Credit Group, Inc. "Our team knows the business of manufacturing and the equipment needed to operate those businesses."
Authored by Julie Murphy, Vice President-Marketing, Commercial Credit Group, Inc.
For more information contact:
Commercial Credit Group, Inc.
855-893-0700
www.commercialcreditgroup.com/section-179-calculator