Leveraging Depreciation and Section 179 for Your MSP’s Benefit with Morgan Holmes

Becky Brown
September 17, 2024
Podcast

Leveraging Depreciation and Section 179 for Your MSP’s Benefit

Depreciation and Section 179 offer significant tax benefits that can help Managed Service Providers (MSPs) maximize cash flow and reduce their tax liability. In our latest Stride Services webinar, tax expert Morgan Holmes, CPA, explained how MSPs can leverage these strategies to optimize their financial health. Here are the key takeaways from the session:

1. Understanding Depreciation and Section 179

Depreciation is a tax deduction that allows businesses to spread out the cost of an asset over its useful life. Section 179 and bonus depreciation are accelerated depreciation methods that enable MSPs to write off a significant portion of asset purchases upfront, encouraging capital investment.

Bonus Depreciation: Allows you to deduct 60% of qualified assets placed into service in 2024. For example, if you place a $10 million asset into service, you can deduct $6 million in the first year. There is no cap on the amount you can claim.
Section 179: Allows for immediate deductions of asset purchases with an annual limit of $1,220,000 for 2024. It’s particularly useful for MSPs looking to manage their taxable income precisely.

Key Insight: Both bonus depreciation and Section 179 can help MSPs improve cash flow by reducing their tax burden.

2. Eligible Investments for MSPs

Morgan highlighted the types of investments that qualify for these tax benefits. For MSPs, this typically includes:

Technology Equipment: Servers, computers, and software.
Infrastructure: Furniture and leasehold improvements.
Vehicles: Both Section 179 and bonus depreciation can be applied to vehicles used for business purposes.

Pro Tip: Most assets with a tax life of 20 years or less can qualify. By investing in these areas, MSPs can reduce their tax burden while reinvesting the savings back into their business.

3. Choosing Between Section 179 and Bonus Depreciation

Morgan explained that MSPs don’t have to choose between Section 179 and bonus depreciation—they can use both to their advantage.

Section 179:
- Flexibility: You can elect specific amounts to be deducted for each asset, allowing you to control your taxable income. For instance, if you want to lower your taxable income to $100,000, you can choose the exact amount of Section 179 depreciation to get you there.
- Annual Limit: In 2024, the limit is $1,220,000, with a total asset capitalization threshold of $3,050,000.
Bonus Depreciation:
- No Limit: Allows for large-scale asset acquisitions without a cap. If you place $10 million in qualified assets into service, you can take $6 million in bonus depreciation immediately.
- Automatic: You are required to take bonus depreciation unless you opt out, making it an efficient way to maximize deductions quickly.

Key Insight: MSPs can strategically combine both methods—using Section 179 to manage taxable income and bonus depreciation for larger acquisitions.

4. Timing is Crucial

A key point Morgan emphasized is that the timing of when you place an asset into service matters. For an MSP to benefit from Section 179 or bonus depreciation, the asset must be in active use during the tax year.

Example: If an MSP purchases new software in December but doesn’t implement it until January of the next year, the deduction can’t be claimed in the year of purchase. Proper tax planning helps MSPs avoid missing out on these valuable deductions.

Pro Tip: Many MSPs make significant investments in Q4. Be sure that assets are in service before the year ends to take advantage of these tax benefits.

5. Leveraging Both Methods for Maximum Benefits

MSPs have the flexibility to use both Section 179 and bonus depreciation. For instance:

Step 1: Apply Section 179 up to the annual limit to manage your taxable income.
Step 2: Use bonus depreciation to maximize deductions on remaining eligible assets.

By combining these strategies, MSPs can optimize their tax position and enhance cash flow.

6. Boosting ROI on Acquisitions

Morgan also mentioned that bonus depreciation can be applied to used assets. If an MSP acquires another company and obtains its fixed assets, bonus depreciation can be used to increase the return on investment for the acquisition.

Key Insight: This is an often-overlooked strategy that can further enhance the financial benefit of mergers and acquisitions within the MSP space.

Final Thoughts

Depreciation, including Section 179 and bonus depreciation, plays a critical role in the cash flow puzzle for MSPs. By planning ahead and working with a tax professional, MSPs can leverage these strategies to reduce tax liabilities, improve cash flow, and reinvest in their business.

For further details or to revisit the discussions from our webinar, watch the full video by clicking the button below or contact our experts directly at Stride Services for personalized advice.

STRIDE LIVE Leveraging Depreciation and Section 179 for Your MSP’s Benefit

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This Stride Live Webinar is hosted by Stride Services. Stride is a comprehensive financial solutions provider, specializing in outsourced bookkeeping, accounting, tax, and advisory services for Managed Service Providers.

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