Save Big on Taxes with Section 179
6 Min read
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October 23, 2023
As a business owner, especially if you are in the small to mid-sized range, you're constantly on the lookout for ways to optimize your taxes. Section 179 has always been a powerful tool in this regard, and for 2024, the provisions have been updated to offer even more benefits. Here's how you can leverage this tax code revision to optimize your business investments.
Taxable Income: Decoding the Numbers
Taxable income forms the basis on which federal income taxes are calculated. It encompasses all sources of income, including wages, bonuses, investment gains, and more. Understanding what constitutes taxable income is crucial for accurate tax reporting. It's worth noting that not all income is taxed equally, and tax deductions play a pivotal role in shaping the final taxable income figure. By strategically managing your finances and leveraging available deductions, you can work towards minimizing your taxable income.
Unlocking Financial Benefits: The Power of Pre-Tax Contributions
Pre-tax contributions represent a savvy financial strategy that can significantly impact your bottom line. By diverting a portion of your income into various pre-tax accounts, you not only reduce your taxable income to pay federal income taxes, but also open the door to a range of financial benefits.
What is Section 179 in Plain English?
Section 179 of the US Internal Revenue Code allows businesses to deduct the full purchase price of qualifying equipment from their gross income in the year of purchase. This immediate expense recognition can substantially reduce your taxable income, freeing up cash for further investment in your business. AKA -- Ready to buy some equipment?
Tax Deduction: A Path to Reduce Taxes
A tax deduction is a powerful tool that allows you to lower your taxable income, thereby your tax bill and reducing the amount of income subject to taxation. Common tax-deductible expenses include mortgage interest, charitable contributions, and certain medical expenses. By identifying and maximizing eligible deductions, individuals can effectively decrease their tax liability, leading to potential tax savings.
Who is Eligible for Section 179?
Essentially any business that purchases qualifying equipment is eligible, including small and mid-size businesses, as well as larger corporations. However, the deduction starts to phase out if the total amount of qualifying equipment purchased during the year exceeds $2.9 million, slightly higher than the previous year.
Reduce Your Taxable Income: Smart Financial Strategies
Reducing taxable income is a key objective for many individuals seeking to optimize their tax situation. This can be achieved through various means, such as contributing to retirement accounts, taking advantage of education-related tax credits, and strategically managing investment portfolios to offset capital gains. Employing these strategies not only lowers your current tax liability but also sets the stage for long-term financial success.
Health Savings Account (HSA): A Triple Win
One powerful tool for reducing taxable income while simultaneously addressing healthcare expenses is the Health Savings Account (HSA). An HSA offers a triple benefit by allowing contributions to be made with pre-tax dollars, permitting tax-free growth on the account's investments, and enabling tax-free withdrawals for qualified medical expenses. This unique combination capital gains tax and makes HSAs an attractive option for individuals looking to both save on taxes and secure their financial future.
Updated Maximum Deduction for 2024
For 2024, the maximum Section 179 deduction has increased to $1,200,000. This adjustment allows businesses to deduct a greater portion of their equipment investments, enhancing the incentive to purchase new or used assets this year.
What Equipment Qualifies for Section 179?
The guidelines remain largely unchanged. The equipment must be:
Tangible and primarily used for your business.
Purchased, not leased (though financing is allowed).
In service and used more than 50% for your business during the tax year.
Not acquired from a related party.
How Section 179 Differs From Traditional Depreciation
Traditional depreciation schedules might require you to write off the cost of the equipment over several years. Section 179 allows you to accelerate this into a single year, which can be particularly beneficial if you're looking to offset a profitable year.
How to Claim Section 179
To claim this deduction, fill out IRS Form 4562. This form will help you calculate the maximum deductible amount and should be included with your business tax return.
Additional 2024 Considerations
Equipment must be in use before December 31, 2024: Make sure you start the acquisition process in time to meet this deadline.
Bonus Depreciation: If you purchase equipment over $1,160,000, you may qualify for Bonus Depreciation. This is a complex area, so consult your tax adviser for more details.
Financing and Section 179: New for 2024, purchasing equipment through financing is eligible for the Section 179 deduction, provided that you gain ownership of the equipment and it meets other qualifying criteria. This arrangement allows businesses to benefit from the deduction while spreading out the expense over time. Make sure the terms of your financing agreement confer ownership immediately, as leasing structures where ownership is not transferred do not qualify. This approach helps businesses manage cash flow while still taking full advantage of the tax benefits offered by Section 179.
Conclusion
In addition to understanding tax deductions and taxable income, familiarizing yourself with key terms such as Earned Income Tax Credit (EITC) is essential. The EITC is a refundable tax credit designed to assist low to moderate-income individuals and families. By exploring credits like the EITC and other tax-saving opportunities, you can further enhance your overall financial picture. By strategically managing your finances and leveraging available resources, you can not only reduce your tax liability but also pave the way for a more secure and prosperous financial future.
The Section 179 tax code is an excellent opportunity for business owners to invest in their operations while enjoying significant tax benefits. And with the updated limits for 2024, there's never been a better time to consider making those large equipment purchases. Take advantage of this tax-saving strategy and reinvest in your business with top-of-the-line equipment from Boom & Bucket!
Further Reading
For more detailed information, consult IRS Form 4562 and IRS Publication 946
Ardi Ghasemi is the Head of Inside Sales at Boom & Bucket. With over a decade of sales leadership experience, he focuses on building high-performing teams and driving success. Passionate about leadership, Ardi also writes on team development and empowering others to reach their potential.