Finance Forward Blog

As we enter the final quarter of 2024, small business owners find themselves at a key juncture for financial planning and decision-making. Understanding depreciation rules at this point in the year is a strategy that can significantly impact your bottom line and help set up your 2025 tax filing to be as advantageous as possible.

What Is Depreciation?

Depreciation is the expensing of an asset's initial cost over the course of its useful life. For the IRS, there are many definitions and rules related to how quickly an asset can turn into deductions on your tax return. Below we'll summarize some of the options that create the biggest benefits for the taxpayer.

Section 179 Deduction

The Section 179 deduction remains a powerful tool for small businesses in 2024. This year, the deduction limit increased to $1,220,000, with a spending cap of $3,050,000. This means you can potentially write off the entire cost of qualifying equipment purchases up to the limit in the year you place them in service.

Bonus Depreciation (AFYD)

Bonus depreciation, also known as Additional First Year Depreciation (AFYD), continues its planned phase-down in 2024. This year, the bonus depreciation rate is 60% for qualifying property. While lower than previous years, it still offers significant tax savings.

Important considerations:

• 60% AFYD will decrease by 20% per year until 2027

• Can be used in conjunction with Section 179

• No spending cap, unlike Section 179

As bonus depreciation continues to phase out (dropping to 40% in 2025 and 20% in 2026), it's crucial to plan your equipment purchases strategically. Consider accelerating planned purchases to take advantage of higher depreciation rates in earlier years.

Vehicle Depreciation Limits

For passenger vehicles placed in service in 2024, the depreciation limits are:

• $20,400 for the first year

• $19,800 for the second year

• $11,900 for the third year

• $7,160 for each subsequent year

These limits apply to vehicles with a gross vehicle weight rating (GVWR) of 6,000 pounds or less.

Alternative: Standard Mileage Rate

Instead of tracking actual expenses and calculating depreciation, you may opt to use the standard mileage rate for business vehicles. For 2024, this rate is 67 cents per mile. This method can simplify record-keeping but may result in lower deductions for some businesses. Learn more about strategies for mileage tracking at the bottom of this blog post.

Note on Business Use Percentage

Remember that depreciation deductions must be allocated based on the percentage of business use for any asset. If you use an asset for both business and personal purposes, you can only depreciate the business-use portion. If the vehicle’s title is put in the business’ name, it is almost always eligible for the maximum amount of writeoff. However, if it is in your personal name as owner, the IRS typically requires the percentage of the vehicle's business use to be deducted only. This can be determined by the number of business vs. personal miles driven, fuel use, or hours driven. Miles is usually preferred as it’s easiest to track.

Example: If you purchase a $50,000 vehicle and use it 80% for business, your depreciable basis would be $40,000 ($50,000 x 80%).

Conclusion

Understanding and leveraging these depreciation rules can significantly impact your tax liability and cash flow. As always, we recommend consulting with a qualified tax professional to ensure you're making the most of these opportunities while staying compliant with IRS regulations. By staying informed and proactive, you can turn these depreciation rules into valuable tools for growing your small business in 2024 and beyond.