Tax Considerations for Purchasing Equipment Before Year-End: A Strategic Guide for 2024

As the end of the year approaches, many business owners start thinking about ways to reduce their tax liabilities for the current tax year. One common strategy is purchasing new equipment or machinery. Depending on how the purchase is structured and the tax laws in place, these acquisitions can provide significant deductions. However, it’s essential to understand the federal and state tax considerations before making a purchase.

In this blog, we will explore the 2024 federal tax rules, including Section 179 and bonus depreciation, and how different states may handle these deductions, especially with potential addbacks that could impact your final tax liability.

Federal Tax Law Considerations for Equipment Purchases in 2024

1.Section 179 Deduction

Under Section 179 of the Internal Revenue Code, businesses can immediately deduct the cost of qualifying property in the year it is purchased and placed in service, rather than depreciating it over several years. This is one of the most popular incentives for purchasing equipment before the end of the year.

For 2024, the Section 179 deduction limit is set at $1,220,000, with a phase-out threshold of $3.05 million. This means that if your business buys more than $3.05 million in qualifying equipment, the deduction begins to phase out dollar-for-dollar. If your total equipment purchases for the year exceed $4.05 million, you cannot take advantage of the Section 179 deduction.

The types of property that qualify for Section 179 are quite broad. It includes machinery, office furniture, computers, and vehicles (with specific limitations for passenger vehicles). One of the biggest advantages of Section 179 is that it allows for immediate full expensing, which can be a significant tax advantage if your business needs equipment and wants to lower its taxable income for the year. For vehicles with a gross vehicle weight rating (GVWR) of 6,000 pounds or more, you can take up to $30,500 of Section 179 depreciation in 2024. The remaining cost can take a 60% bonus depreciation deduction, which is mentioned below.

2.Bonus Depreciation

In addition to the Section 179 deduction, businesses may also benefit from bonus depreciation under the Tax Cuts and Jobs Act (TCJA). For 2024, businesses can claim 60% bonus depreciation on qualified assets, which include new and used property with a useful life of 20 years or less.

Bonus depreciation allows businesses to write off a significant portion of the purchase price in the year the equipment is placed in service. This can be especially beneficial for large capital investments, as it provides an immediate tax benefit. Unlike Section 179, there is no spending limit or phase-out threshold for bonus depreciation, and it can apply to purchases that exceed the Section 179 limit.

In 2024, businesses can deduct 60% of the cost of qualified property in the first year, with the remaining 40% being depreciated in subsequent years. The bonus depreciation rate will phase down to 40% in 2025, so if your business is planning a large purchase, it may be advantageous to buy before year-end to lock in the higher deduction.

3. Impact of the Inflation Reduction Act and Other Legislation

While the Inflation Reduction Act did not significantly alter the rules for Section 179 or bonus depreciation, other provisions in the act may influence equipment purchases. For example, some businesses may be eligible for tax incentives related to energy-efficient equipment, such as electric vehicles or renewable energy systems. If you’re considering an environmentally friendly equipment purchase, it’s worth investigating any special incentives that may apply.

State Tax Law Considerations

State tax laws can vary widely when it comes to equipment purchases, and there are several important factors to consider when deciding whether to buy equipment before the end of the year.

1. State Addbacks for Bonus Depreciation

While bonus depreciation is fully deductible at the federal level, many states do not conform to the federal rules and may require an addback of bonus depreciation on the state tax return. This means that while you may be able to deduct the full cost of equipment on your federal return, your state return may require you to add back some or all of the bonus depreciation deductions, which could increase your state taxable income.

For example, if your business claims 80% bonus depreciation on a piece of equipment, but your state only allows for standard depreciation, you may have to add back the 80% deduction on your state tax return and then spread the deduction over several years. States like Minnesota, Wisconsin, and Iowa have historically had add-back provisions, though the specific rules can vary.

It’s important to check the rules in your state, as this could impact the overall tax benefit of purchasing equipment. Some states do not offer any depreciation or Section 179 benefits at all, which may reduce the incentive for businesses to make significant equipment purchases before year-end. Similar to federal tax law, state tax law can change each year, so be sure to double-check the rules.

2. State-Specific Incentives

In some states, there are unique programs or tax incentives for businesses that purchase equipment or invest in certain industries. For instance:

• Ohio offers a sales tax exemption for purchases of manufacturing machinery and equipment.
• New York provides tax credits for certain capital investments in environmentally friendly equipment.

Check with your state’s tax authority or a local tax professional to determine if there are any state-specific programs that could further reduce your costs or provide additional benefits.

3. Local Tax Considerations

In addition to state tax laws, local taxes, including sales tax and business personal property tax, can also influence the decision to buy equipment before the end of the year. Many local governments impose property taxes on business equipment, and these taxes are typically assessed based on the equipment’s value as of January 1st. By purchasing before year-end, you can potentially reduce your personal property tax liability for the upcoming year.

Strategic Timing for Equipment Purchases

The timing of your equipment purchase can significantly affect your business’s tax situation. If you’re planning a significant acquisition, consider the following strategies:

• Buy before December 31st: In order to claim the full deduction for the current tax year, you must purchase the equipment and place it in service by December 31st.
• Plan for future years: If your business is growing and you expect to exceed the Section 179 limits in the near future, it may be worth purchasing equipment this year to maximize your deductions. Alternatively, if your business is facing a down year, you might opt to delay your purchases until next year to take advantage of depreciation over time.

Conclusion

Purchasing equipment before the end of the year can be a powerful strategy for reducing tax liability and positioning your business for growth. By leveraging federal incentives like Section 179 and bonus depreciation, along with understanding your state’s tax treatment of equipment purchases, you can maximize the financial benefits of your investment. However, be sure to consult with a tax professional to navigate both federal and state rules, as well as any local tax considerations, to ensure that your equipment purchase aligns with your business’s broader financial goals.