When you purchase equipment and assets for your business, you don't have to deduct the entire cost in one year. The tax code provides powerful depreciation methods that can save you thousands of dollars. Understanding Section 179, bonus depreciation, and regular depreciation can dramatically reduce your tax liability while you're building your business.

What Is Depreciation?

Depreciation allows you to deduct the cost of business assets over their useful life. Instead of deducting the full purchase price in one year, you spread the deduction across multiple years, matching the asset's decline in value.

Three Ways to Deduct Equipment Costs

1. Section 179 Expensing (Immediate Deduction)

Section 179 allows you to deduct the full cost of qualifying equipment in the year purchased:

2024 Section 179 Limits

• Maximum Deduction: $1,160,000Maximum Deduction:
• Phase-Out Threshold: $2,890,000 (reduces dollar-for-dollar above this)Phase-Out Threshold:
• Qualifying Property: Equipment, vehicles, software, furnitureQualifying Property:
• Must Be Placed in Service: During the tax yearMust Be Placed in Service:
• Business Use Requirement: Must be used more than 50% for businessBusiness Use Requirement:

Benefits of Section 179

• Immediate tax deduction (not spread over years)
• Reduces current year tax liability
• Can create or increase business losses
• Simpler than depreciation

2. Bonus Depreciation (Additional First-Year Deduction)

Bonus depreciation provides an additional first-year deduction on top of Section 179:

2024 Bonus Depreciation

• Percentage: 60% (decreasing each year)Percentage:
• 2025: 40%2025:
• 2026: 20%2026:
• 2027+: 0% (scheduled to expire)2027+:
• Applies To: New and used propertyApplies To:
• No Limit: Unlike Section 179No Limit:

How Bonus Depreciation Works

• Apply after Section 179
• Deduct percentage of remaining basis
• Remainder depreciated normally
• Can be used on property Section 179 doesn't cover

3. Regular Depreciation (MACRS)

Modified Accelerated Cost Recovery System (MACRS) spreads deductions over asset life:

Common Depreciation Periods

• 5-Year Property: Computers, vehicles, office equipment5-Year Property:
• 7-Year Property: Office furniture, fixtures7-Year Property:
• 15-Year Property: Land improvements15-Year Property:
• 39-Year Property: Commercial buildings39-Year Property:

Qualifying Property for Section 179

Section 179 applies to tangible personal property:

• Machinery and equipment
• Computers and software
• Office furniture and fixtures
• Vehicles (with limitations)
• Qualified improvement property
• Certain real property (limited)

Vehicle Depreciation Special Rules

Vehicles have special depreciation limits:

Passenger Vehicles (Cars)

• 2024 First-Year Limit: $20,4002024 First-Year Limit:
• Applies to vehicles under 6,000 lbs
• Heavier vehicles (SUVs, trucks) have higher limits
• Can combine with Section 179 (with limits)

Heavy Vehicles (SUVs, Trucks over 6,000 lbs)

• Higher depreciation limits
• Section 179 up to $30,500 (2024)
• More favorable treatment
• Must be used more than 50% for business

Real-World Examples

Example 1: Computer Equipment Purchase

Situation: Purchase $25,000 in computer equipmentSituation:

• Section 179 deduction: $25,000 (full amount)
• Tax savings (22% rate): $5,500
• Effective cost: $19,500

Example 2: Large Equipment Purchase

Situation: Purchase $150,000 in manufacturing equipmentSituation:

• Section 179 deduction: $150,000 (within limits)
• Tax savings (22% rate): $33,000
• Effective cost: $117,000

Example 3: Combining Methods

Situation: Purchase $200,000 in equipmentSituation:

• Section 179: $1,160,000 (but only $200,000 needed)
• Full $200,000 deducted in year 1
• Tax savings (22% rate): $44,000
• If business has losses, creates larger NOL carryforward

Example 4: Vehicle Purchase

Situation: Purchase $45,000 business vehicle (under 6,000 lbs)Situation:

• First-year depreciation limit: $20,400
• Remainder depreciated over 5 years
• First-year tax savings (22% rate): $4,488
• Additional savings in future years

Software and Intangible Assets

Computer Software

• Off-the-shelf software: Section 179 eligible
• Custom software: May need to be amortized
• Cloud software subscriptions: Deductible as current expense

Intangible Assets

• Goodwill: Amortized over 15 years
• Patents and copyrights: Amortized over useful life
• Customer lists: Amortized over 15 years

Strategic Depreciation Planning

1. Timing Equipment Purchases

• Purchase before year-end to get current year deduction
• Consider tax bracket when planning
• Coordinate with other tax strategies
• Plan for bonus depreciation phase-out

2. Maximizing Current Year Deductions

• Use Section 179 for immediate deduction
• Combine with bonus depreciation
• Create or increase business losses
• Offset other income sources

3. Spreading Deductions Over Time

• Sometimes regular depreciation is better
• If you're in a low tax bracket now, higher later
• If you don't have tax liability to offset
• Plan for future tax situations

Common Mistakes to Avoid

• Not claiming Section 179: Many businesses miss this valuable deductionNot claiming Section 179:
• Incorrect asset classification: Wrong depreciation periodIncorrect asset classification:
• Not tracking basis: Important for future salesNot tracking basis:
• Mixing personal and business use: Only business portion deductibleMixing personal and business use:
• Not placing in service: Must be ready for useNot placing in service:
• Forgetting about recapture: May owe tax if asset sold earlyForgetting about recapture:

Depreciation Recapture

If you sell depreciated property:

• Gain up to depreciation taken is "recaptured"
• Taxed as ordinary income (not capital gains)
• Can result in unexpected tax liability
• Plan asset sales carefully

Like-Kind Exchanges (1031 Exchanges)

For certain property, you can defer depreciation recapture:

• Exchange business or investment property
• Defer gain recognition
• Complex rules and requirements
• Consult a tax professional

Documentation Requirements

To claim depreciation deductions, maintain:

• Purchase receipts and invoices
• Date placed in service
• Business use percentage
• Depreciation calculations
• Form 4562 (Depreciation and Amortization)
• Records of any sales or disposals

Form 4562: Depreciation and Amortization

You must file Form 4562 to claim:

• Section 179 deductions
• Bonus depreciation
• Regular depreciation
• Amortization
• Vehicle expenses (if using actual expense method)

Conclusion

Equipment and asset depreciation are powerful tax tools that can save you thousands of dollars. Section 179 expensing, bonus depreciation, and regular depreciation provide multiple ways to deduct equipment costs, and strategic planning can maximize your tax savings.

Remember: You need tax liability to realize these financial advantages, but with proper planning, equipment purchases can significantly reduce your tax burden. America's tax code encourages business investment through depreciation incentives, and understanding how to use these benefits is essential for any business owner making equipment purchases.