Practical tips to make the most of tax deductions and ensure your business keeps more of its hard-earned money.
When it comes to optimizing your tax strategy, there are some powerful tools available to business owners. Two of those are the Qualified Business Income (QBI) deduction and the Section 179 deduction.
These incentives can both lead to significant tax savings when they’re used effectively.
Qualified Business Income (QBI) Tax Deduction
The QBI deduction allows eligible business owners to deduct up to 20% of their qualified business income. Eligible taxpayers include individuals with income from a pass-through entity, including sole proprietorships, partnerships, and S corporations.
For 2024, the QBI deduction begins to phase out when taxable income exceeds $383,900 for married couples filing jointly, or $191,950 for single filers. Once your taxable income surpasses these thresholds, limitations based on W2 wages paid and the unadjusted basis immediately after acquisition (UBIA) come into effect.
If your business is in a specified service field, such as health, law, accounting, consulting, athletics, financial services, or brokerage services, then the QBI deduction phases out entirely once taxable income reaches certain levels. For married couples filing jointly, the deduction is fully phased out at $483,900; for single filers, it phases at $241,950.
If your business isn’t in a specialized service field, then the deduction doesn’t phase out entirely once you reach the income threshold—but it’s limited to the lesser of one of the following:
- 20% of your QBI, or
- The greater of 50% of W2 wages paid, or 25% of W2 wages paid plus 2.5% of the UBIA of qualified property
The W-2 wages your business pays and the value of its qualified property directly determine the deduction you’re allowed to claim.
Strategies to Maximize the QBI Tax Deduction
One way to maximize the deduction is to keep your taxable income below the phase-out thresholds. This can be achieved by deferring income, accelerating deductible expenses, and contributing to tax-deferred retirement plans.
Once taxable income exceeds the threshold, however, you’ll likely want to increase W2 wages. Many pass-through business owners are inclined to minimize W2 wages to reduce payroll taxes, but this strategy can significantly limit your QBI deduction. In many cases, the tax savings from a higher QBI deduction can outweigh the additional payroll taxes incurred by increasing W2 wages.
The rules surrounding the QBI deduction are intricate and vary based on individual circumstances. Given this complexity, it’s crucial to consult with your CPA to receive personalized advice and ensure you’re maximizing the deduction while complying with all tax laws and regulations.
Section 179 Tax Deduction
Section 179 lets you deduct the full purchase price of qualifying equipment and software in the year it’s placed in service.
For 2024, the deduction limit is $1.22 million, with an investment ceiling of $3.05 million. This applies to most new depreciable property like machinery, equipment, off-the-shelf software, and certain nonresidential building improvements, including roofs, HVAC, fire protection, and security systems.
Even if you acquired the qualifying property late in the year, you could still deduct the full amount in that year; however, Section 179 deductions cannot exceed your business’s taxable income for the year. Any excess is carried forward to future years.
Don’t Forget Bonus Depreciation
Bonus depreciation allows you to deduct 60% of the cost of eligible property in 2024 and does not have a phase-out threshold, but it’s scheduled to decrease to 40% in 2025. Unlike Section 179, bonus depreciation does not have an annual deduction limit and can create a net operating loss since it’s not limited by taxable income.
Bonus depreciation applies to a broad range of property, including some assets not eligible for Section 179, such as used machinery, equipment, or vehicles acquired from an unrelated party, and certain assets with a recovery period of 20 years or more.
Maximizing Both Tax Deductions
You can use both Section 179 and bonus depreciation in the same year but not on the same asset. Generally, it’s advantageous to maximize your Section 179 deduction first because it allows you to deduct 100% of the cost of the asset in the year it’s placed in service, compared to the 60% deduction provided by bonus depreciation in 2024.
If you plan to use both deductions, it’s essential to review all qualifying assets and determine which ones qualify for Section 179 but not bonus depreciation and vice versa. This ensures compliance and maximizes your tax savings.
For instance, let’s say your company invests in new equipment and property improvements totaling $2 million:
- $1 million for new machinery and equipment
- $800,000 for used equipment purchased from an unrelated party
- $200,000 for HVAC and roof upgrades
You would apply the Section 179 deduction to the nonresidential real property improvements because they don’t qualify for bonus depreciation. Then, you would use the remaining Section 179 deduction on the new equipment that qualifies for both deductions. Finally, you’ll apply bonus depreciation to assets not covered by Section 179.
Keep in mind that state tax laws may differ from federal laws regarding Section 179 and bonus depreciation, so it’s important to consider state tax implications when choosing between the two deductions.
To ensure you get the most out of the two deductions, consult with a tax professional. They’ll help you identify which assets qualify for each deduction and develop a strategy to maximize tax savings.
Jeff Bronswick is CEO at Bronswick Benjamin, an NSCA Member Advisory Councilmember.
