IRS Depreciation Adjustments for 2024

 

IRS Depreciation Adjustments for 2024: What Business Owners and Investors Need to Know

As tax season approaches, it’s crucial for business owners, property investors, and accountants to stay up-to-date on the latest IRS adjustments to depreciation rules for the upcoming year. Depreciation, the gradual deduction of an asset's cost over its useful life, is a powerful tool for reducing taxable income, but it comes with rules and adjustments that change annually. Here’s an overview of the IRS’s key depreciation updates for 2024 and how these changes might affect you.

1. Changes in Bonus Depreciation Rates

For the last few years, businesses enjoyed a 100% bonus depreciation, allowing them to deduct the entire cost of qualifying assets in the first year. However, this is set to change in 2024. The bonus depreciation rate will reduce to 60% as part of a gradual phase-down under the Tax Cuts and Jobs Act (TCJA) of 2017. Here’s how it will look:

• 2024: 60%
• 2025: 40%
• 2026: 20%
• 2027 and beyond: 0% (unless new legislation changes this)

This means that businesses purchasing eligible assets will only be able to deduct 60% of the asset’s cost in the first year and then depreciate the remaining 40% over the asset's useful life.

Impact: The phase-down in bonus depreciation could impact cash flow for businesses that rely on large, upfront deductions. Businesses should consider this change in their capital expenditure planning.

2. Section 179 Deduction Limit Increase

The IRS has adjusted Section 179 deduction limits for 2024. Under Section 179, businesses can expense certain assets immediately up to a specified limit, rather than depreciating them over several years. For 2024, the Section 179 deduction limit has been increased to $1.2 million (up from $1.16 million in 2023), and the phase-out threshold for asset purchases has increased to $3.4 million.

3. Luxury Vehicle Depreciation Limits

For business owners using vehicles for company purposes, 2024 brings updated depreciation limits for "luxury vehicles." The IRS sets maximum depreciation limits for passenger vehicles, even if they are used entirely for business purposes. For 2024, these limits are expected to increase slightly to account for inflation. Here’s the general breakdown for business-use passenger vehicles:

• Year 1: Approximately $20,200 (with bonus depreciation)
• Year 2: $19,500
• Year 3: $11,700
• Year 4 and beyond: $6,960 per year until fully depreciated

4. Adjustments for Inflation

In 2024, the IRS has adjusted several depreciation-related thresholds to account for inflation, impacting both Section 179 deductions and asset category limits. For example, property placed in service in 2024 will use updated tables based on the Modified Accelerated Cost Recovery System (MACRS) and other schedules adjusted for inflation.

5. New Compliance and Reporting Requirements

Starting in 2024, the IRS is requiring additional documentation and stricter reporting for assets placed in service under special depreciation rates. These requirements include details about asset classification, usage, and how they meet eligibility requirements for accelerated depreciation.

Tax Planning Tips for 2024

Given these updates, here are a few ways to maximize the benefits of depreciation deductions in 2024:

1. Review Asset Purchases Carefully: With bonus depreciation reduced, weigh the impact of large purchases. Consider spreading them over multiple years if cash flow is a concern.
2. Maximize Section 179: Take advantage of the increased Section 179 deduction for qualifying assets, especially if you’re purchasing equipment or vehicles.
3. Consider Timing of Purchases: If your business is planning major acquisitions, consider the timing within the tax year to optimize deductions.
4. Update Your Tax Strategy: The changes to bonus depreciation and inflation adjustments mean that an updated depreciation strategy could improve cash flow. Consult with a tax advisor to tailor your plan based on these new limits.

Final Thoughts

The IRS adjustments to depreciation for 2024 signal a shift toward a less aggressive depreciation landscape as bonus depreciation phases out. Staying informed of these changes can help business owners make strategic decisions and optimize their tax obligations. If you’re a business owner, property investor, or tax professional, consult with an accountant or tax advisor to ensure compliance and take full advantage of the available deductions.

Trump's Tax Plan

 Donald Trump's tax plan proposes a mix of tax cuts, incentives for specific industries, and significant tariff increases, aiming to boost economic growth while advancing his economic and trade policy priorities.

A major element of his plan is to make the 2017 Tax Cuts and Jobs Act (TCJA) permanent. This includes retaining reduced individual and corporate tax rates, which otherwise will expire after 2025. Additionally, Trump suggests restoring full deductions for state and local taxes (SALT), potentially benefiting high-income earners in states with higher tax burdens. His plan also proposes exempting certain types of income, like tips, Social Security, and overtime pay, from income tax, which could reduce taxable income for many workers and provide modest economic stimulus.

For corporations, Trump aims to lower the corporate tax rate specifically for domestic manufacturing to 15%, positioning the U.S. as more competitive for industrial production. He has also proposed removing tax credits related to green energy, targeting the rollback of incentives from the Inflation Reduction Act.

Trade policies are integral to his 2024 plan as well. Trump’s proposal includes a universal 20% tariff on all imports, with an additional 60% tariff on imports from China, a move designed to protect U.S. industries but expected to raise consumer costs. Analysts predict that while this could increase revenue, it might also lead to economic contraction due to potential retaliation from trading partners and rising import prices for consumers.

Economists estimate that his plan could boost GDP modestly by up to 0.8% over the long run, but it may also increase the national debt by trillions over the next decade, depending on growth and revenue assumptions. This deficit increase stems in part from anticipated lower tax revenues and higher interest payments on new debt, leading to a projected rise in the debt-to-GDP ratio​.

 

What If the Tax Cuts and Jobs Act Isn’t Extended? Key Changes to Expect

The Tax Cuts and Jobs Act (TCJA), enacted in late 2017, brought significant changes to the American tax landscape. As we approach its expiration in 2025, many are left wondering what might happen if the act isn’t extended. Here’s a look at the potential consequences for individuals, businesses, and the economy as a whole.

1. Increased Tax Rates for Individuals

One of the most immediate impacts of the TCJA expiring would be a return to higher tax rates for many Americans. The act lowered tax brackets and rates, providing relief for middle-class families and reducing the overall tax burden. Without an extension, taxpayers could face increases in their marginal tax rates, which might mean less take-home pay and decreased disposable income.

2. Elimination of the Increased Standard Deduction

The TCJA nearly doubled the standard deduction, making it a popular option for many filers. If the act is not extended, this deduction would revert to its pre-TCJA levels, potentially increasing taxable income for millions. Families who benefitted from the larger deduction could see their tax bills rise significantly.

3. Changes to Itemized Deductions

The TCJA also made changes to itemized deductions, including the limitation on state and local tax (SALT) deductions to $10,000. If the act expires, this cap could disappear, leading to different outcomes based on geographic location. Taxpayers in high-tax states could see their deductions increase, but those in lower-tax areas might find it less impactful.

4. Corporate Tax Rate Increases

The corporate tax rate was lowered from 35% to 21% under the TCJA, providing businesses with more capital for investment and growth. Without an extension, corporations could face a significant tax hike, which may impact their ability to reinvest profits, pay dividends, or hire new employees. This could slow economic growth and affect job creation.

5. Changes to Estate Tax Exemptions

The TCJA raised the estate tax exemption significantly, allowing individuals to pass on larger estates without incurring taxes. If these provisions expire, the exemption would revert to pre-TCJA levels, potentially impacting estate planning strategies for wealthy families and increasing the tax burden on heirs.

6. Impact on Economic Growth

The TCJA aimed to stimulate economic growth through various measures, including tax incentives for businesses. If the act is not extended, there could be a chilling effect on investment and consumer spending, leading to slower economic growth. Businesses might scale back expansion plans, and individuals may tighten their budgets.

7. Potential for Increased Deficit

While the TCJA aimed to stimulate growth, it also increased the federal deficit. If tax cuts expire, there could be a balance between revenue generation and deficit reduction, but it may also lead to debates over how to manage the federal budget moving forward.

8. Political Ramifications

The expiration of the TCJA is likely to reignite political debates around tax policy. Lawmakers will need to navigate differing opinions on taxation, economic growth, and social equity. The outcomes could influence upcoming elections, with candidates offering various proposals to address the potential tax changes.

Conclusion

The potential expiration of the Tax Cuts and Jobs Act could lead to a host of changes affecting individual taxpayers, businesses, and the economy. Whether it’s through increased tax rates, reduced deductions, or shifts in corporate taxation, the impacts could be significant. As we approach the 2025 deadline, it's crucial for taxpayers to stay informed and consider how these changes could affect their financial situations. Engaging in conversations about tax policy now could help shape a more favorable outcome in the future.