Tax Savings: Claiming Section 179 for Manufacturing and Distribution

Manufacturing and distribution organizations have benefited from 100% bonus depreciation for years. However, the amount of bonus depreciation you can claim each year has decreased as part of the 2017 Tax Cuts and Jobs Act (TCJA) and will completely phase out after 2026 unless new legislation is passed. Another option is the Section 179 deduction, which allows manufacturing and distribution organizations to fully expense some of their assets, but it has limitations. 

Section 179 vs. Bonus Depreciation 

The TCJA changed the rules for bonus depreciation by allowing organizations to write off 100% of the cost of eligible property placed in service after September 27, 2017, and before January 1, 2023. However, the bonus depreciation percentage has decreased by 20 points each year for properties placed in service after December 31, 2022. Unless new legislation is passed, bonus depreciation will completely phase out after tax year 2026. 

For 2024, the maximum bonus depreciation deduction is 60% of an asset’s cost. Unlike Section 179, you can utilize bonus depreciation even if your organization operates at a loss, and there is no annual limit on the amount you can claim with bonus depreciation, which is useful for larger organizations with significant capital expenditures. Bonus depreciation can also be applied to a broader range of property, including certain land improvements and farm buildings, which are not eligible under Section 179. 

2024 Section 179 Limits  

While Section 179 does have more limitations than bonus depreciation, it can provide significant tax advantages for small to mid-sized manufacturing and distribution organizations that meet the eligibility requirements. Section 179 allows organizations to deduct the total cost of qualifying equipment and property in the year of purchase rather than depreciating it over several years, which can provide immediate tax relief and improve cash flow. To be eligible for Section 179 in a year, organizations must have taxable income, and the deduction cannot put them in a loss position. There's also a threshold for the number of assets you can place in service in a year and still be eligible.  

For 2024, the maximum deduction under Section 179 has increased to $1.22 million, up from $1.16 million in 2023. However, this benefit phases out on a dollar-for-dollar basis once total asset purchases exceed $3.05 million, up from $2.89 million in 2023, meaning larger manufacturers may see limited benefits from Section 179 expensing.  

Qualifying Equipment and Assets for Section 179  

Organizations can depreciate most tangible property (excluding land), such as machinery, buildings, vehicles, equipment, and furniture. Organizations can also depreciate some intangible property, such as copyrights, patents, and computer software.  

Property must meet all the following requirements to be depreciable:

• You must own the property; 
• You must use the property in your income-producing activity or business; 
• The property must have a determinable useful life; and
• The property must be expected to last for more than one year. 

For the Section 179 deduction purposes, you own a property even if you have debt. For example, if you buy a new vehicle you intend to pay for over the next five years, you “own” that vehicle and can depreciate it. 

You can use the Section 179 deduction on a property you use for personal and business purposes; however, you must use the property primarily for business purposes (over 50% of the time), and you may only deduct depreciation based on business use. For example, if you use a vehicle 60% of the time for business use and 40% for personal use, you may deduct depreciation based on the vehicle's business use. The IRS will expect you to keep a mileage log to track business use and remember that miles spent commuting to a place of work are considered personal—not business—use. 

Section 179 Vehicle Deductions 

Vehicles used in your organization typically qualify for the Section 179 deduction. The deduction amount is contingent upon multiple factors, including type of vehicle, build and intent, weight, and percentage of time the vehicle is used for business purposes. Vehicles can be new or used and should be titled in the organization’s name (as opposed to the owner’s name). The deduction also applies to vehicles leased, bought, or financed through Section 179 Qualified Financing (see “Section 179 Qualified Financing” below).  

Vehicles intended for work use only typically qualify for a full Section 179 deduction. Work-use-only vehicles are unlikely to be used for personal purposes by nature and include:

• Classic cargo vans 
• Heavy equipment such as forklifts or skid steers
• Transport vehicles like shuttle vans
• Over-the-road tractor trailers 
• Special purpose vehicles, such as hearses or ambulances 

SUVs and trucks weighing between 6,000 lbs. and 14,000 lbs. in gross vehicle weight rating (GVWR) may qualify for a partial Section 179 deduction if they’re used more than 50% of the time for business. Pickup trucks with full-size (eight-foot) cargo beds and heavy SUVs generally qualify, but heavy SUVs are subject to a maximum deduction cap of $30,500 for 2024. Luxury vehicles under 6,000 lbs. are considered listed property and any Section 179 deduction will be limited. 

Section 179 Qualified Financing 

Section 179 Qualified Financing can be used with an Equipment Finance Agreement (EFA) or certain leases and allows organizations to deduct the total purchase price of qualifying equipment leased or financed during the tax year. To potentially qualify for Section 179 financing, organizations must have been operational for at least two years and have a favorable credit history. 

Meeting the basic qualifications doesn’t automatically mean you’ll receive Section 179 financing. Approval for Section 179 Qualified Financing depends on a lender’s assessment of your creditworthiness, and the lender decides the details and conditions of any business loan. 

When Is a Property Placed in Service? 

It's important to remember that property is placed in service when it's available for a specific use, and this might not be the year you purchased the property. For example, if you bought a machine for your organization that was delivered in 2023 but was installed and became operational in 2024, that machine would be considered placed in service in the tax year 2024. On the other hand, if you purchased a vehicle for business purposes in 2023, and it is operable and ready to use, the vehicle is considered placed in service for the tax year 2023, even if it's idle.   

A common Section 179 tax planning strategy includes accelerating fixed asset purchases you’re planning into the current tax year. For example, if you plan on purchasing vehicles for your organization in Q1 or Q2 of 2025, it may be advisable to purchase those vehicles in Q4 of 2024, allowing you to take 100% of the deduction in 2024 (assuming you’re eligible and the purchase is necessary). 

Navigating Section 179 Deduction Limitations  

Section 179 expensing can't exceed an organization's net taxable income generated from business activities, so careful tax planning is essential to maximize benefits. For example, if a manufacturing organization generates $2 million in net taxable income and places $2.1 million of business property in service, the deduction is limited to $2 million for that tax year. The remaining $100,000 can be carried forward for an unlimited number of years (with limitations) and deducted in the future.  

It’s important for manufacturers and distributors to consult their advisors about their taxable income projections before making fixed asset purchases. Keep in mind that the proposed Tax Relief for American Families and Workers Act of 2024 would restore 100% bonus depreciation through the end of 2025. If passed, the bill could make Section 179 a less optimal tax strategy.