How Manufacturers Can Factor Depreciation Tax Breaks Into Their 2024 Asset Purchase Planning

By: Cheryl Lanese

February 15, 2024March 22, 2024

When manufacturers purchase equipment and other tangible property, they can take advantage of various tax incentives, such as Section 179 expensing and first-year bonus depreciation. Bonus depreciation has been decreased by an additional 20 percentage points in 2024 as part of the Tax Cuts and Jobs Act (TCJA) phaseout. However, the Sec. 179 expensing cap increased this year due to another TCJA provision.

Additionally, on January 31, the U.S. House of Representatives approved the Tax Relief for American Families and Workers Act of 2024 (TRAFWA). As part of the legislation, the act extends 100% bonus depreciation for property placed in service before January 1, 2026. The bill also slightly increases the Sec. 179 expensing limit for property placed in service after 2023. As of this writing, it is uncertain if the bill will be passed by the Senate.

With this tax code uncertainty, manufacturers may wonder how taxes should factor into their plans for asset acquisition in 2024 and beyond.

Consider Section 179 Expensing

Sec. 179 expensing enables manufacturing businesses to deduct (rather than depreciate over a number of years) the cost of purchasing eligible new or used assets, such as equipment, furniture, off-the-shelf computer software, and qualified improvement property (QIP), which are placed in service during the tax year. (The QIP includes modifications to interior areas of nonresidential real estate.)

A manufacturer can use Sec. 179 expensing to expense 100% of the cost of eligible property, up to a certain limit. The TCJA doubled the expensing limit, which is indexed annually, from $500,000 to $1 million. For 2024, the maximum is $1.22 million, up from $1.16 million in 2023.

However, if the cost of assets exceeds an annual threshold, the maximum Sec. 179 expensing election is decreased dollar for dollar. The TCJA raised the threshold from $1 million to $2.5 million and adjusted it for inflation. For 2024, the threshold is $3.05 million (up from $2.89 million in 2023).

Because of these cost constraints, mid-sized and larger manufacturers may gain little, if at all, from Sec. 179 expensing. The proposed increases to both limits in 2024 would not help much because they are fairly small. The TRAFWA increases the expensing limit to $1.29 million and the phaseout threshold to $3.22 million.

Keep in mind that Section 179 expensing cannot exceed net taxable income from business activities. For example, if your manufacturing company earns $900,000 in net taxable income and invests $1 million in commercial property, the deduction is limited to $900,000. However, the company can still carry forward any disallowed deduction to future years due to the taxable income limitation.

Review Bonus Depreciation

Because of the dollar limits on Sec. 179 expensing, bonus depreciation can be a more valuable tax break for larger businesses, even when it is less than 100%. It can also be more advantageous for start-ups and other smaller firms making substantial asset investments because bonus depreciation deductions can exceed net taxable income, resulting in a net operating loss that can be carried forward to offset revenue in subsequent years.

Prior to the TCJA, manufacturers could claim bonus depreciation of up to 50% of the cost of new qualifying property placed into service during the tax year. Qualified property includes machinery and equipment, computers, automobiles, and office furniture that could be depreciated under the Modified Accelerated Cost Recovery System (MACRS) in 20 years or fewer. It also includes off-the-shelf software and QIP.

The TCJA increased the bonus depreciation percentage from 50% to 100% for qualified property placed in service after September 27, 2017, but before January 1, 2023. As a result, 100% bonus depreciation was extended to QIP (which was accidentally left out of the law). The TCJA also extended bonus depreciation to used property under certain conditions.

However, the TCJA phases out bonus depreciation for property placed in service through 2026: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% after 2026.

Thus, if a company installs $100,000 of equipment in its plant in 2024, bonus depreciation will be capped at $60,000, unless TRAFWA or other legislation increasing the percentage becomes law.

Monitor Proposed Tax Law Changes

Sec. 179 expensing and bonus depreciation are both elected on a tax return for the tax year in question. Sec. 179 expensing is claimed first, and then bonus depreciation can be applied to the remaining costs. Any amount that remains can be depreciated under the MACRS.

If the asset purchases your manufacturing company plans to make in the next couple of years are unlikely to exceed the Sec. 179 expensing limits, you shouldn’t be overly concerned with the scheduled phaseout of bonus depreciation — or whether an extension of 100% bonus depreciation will be signed into law. However, if your company’s asset purchases will be substantial, you should keep a careful watch on what happens with bonus depreciation.

Because 60% bonus depreciation could dip to 40% next year, you may wish to expedite purchases to put assets into service in 2024 to use the larger percentage. If the TRAFWA is signed into law and 100% bonus depreciation is reinstated for 2024 and 2025, you may want to plan for more expensive purchases this year and next, as bonus depreciation will fall to 20% in 2026 and 0% in 2027 (unless Congress extends the 100% level). It might even make sense to obtain a loan to buy equipment and other qualified property. Even if the purchase is made using borrowed money, the bonus depreciation percentage can be applied to the entire amount.

Remember that bonus depreciation and Sec. 179 expensing can be claimed on property put into service as late as December 31. So, you still have plenty of time to plan your purchases for the year.

Manufacturers must consider more than just taxes when making asset purchases. There could be other strategic or financial considerations that outweigh possible tax advantages. Furthermore, in some cases, a manufacturer may save more tax in the long run by foregoing both Sec. 179 expensing and bonus depreciation in favor of the MACRS or straight-line depreciation techniques.

We Can Help

Uncertainty about tax laws only complicates planning. Please contact us if you have any questions about tax law developments, Section 179 expensing, or bonus depreciation. We’d be happy to help.