Business Property
Purchases
Can Trigger Multiple Tax Deductions
For 2004, business owners are allowed to
"expense" up to $102,000 of the cost of new equipment and other personal
property purchased for use in a trade or business during their tax
preparation. This tax deduction is
available under Internal Revenue Code Section 179, and is called the
Section 179 deduction. There are eligibility limits for the deduction based on the
total amount of new personal property purchased during the year -- the
limit on the first year write-off begins to phase out if the total amount
of eligible property purchased during the year exceeds $410,000.
If you purchase equipment for business use in 2003 or 2004, you also have two options for deducting either an additional 50
percent or an
additional 30 percent of the cost of the new asset in the year of
purchase. This so-called "bonus depreciation" deduction is
computed after any Section 179 deduction taken on the asset. The
remaining cost of the asset is then depreciated using the applicable
method. The taxpayer has the option NOT to take either the
additional 50 percent or the additional 30 percent deduction, but must
attach a specific election waiving either or both of those
deductions to the federal tax return. Both of the bonus depreciation
options expire after December 31, 2004.
Property that is eligible for an additional first-year depreciation
deduction is any asset that you purchase for use in your trade or business
that has a useful life of 20 years or less. This rules out the
additional depreciation for real estate, such as residential rental
property or commercial real estate.
The property must also be new property, first placed in
service by you. Property you purchase used does not qualify for
bonus depreciation (but DOES qualify for the Section 179 write-off).
The Section 179 and bonus depreciation deductions are
IN ADDITION to the "regular" first-year depreciation under the Modified
Accelerated Cost Recovery System (MACRS), which is typically 20% for
assets with an IRS life of five years. See the
Bonus Depreciation Table for an
example.
NOTE: The maximum first-year write-off cannot exceed
the original basis (usually purchase price) of a business asset.
Knowledge of the depreciation options can reduce what's owed Uncle Sam
during tax preparation and give you an advantage in projecting future
depreciation deductions during your income tax planning.
But watch out for
possible tax traps
related to the bonus depreciation deductions, particularly in states which
did NOT conform state tax law to the new federal rules!
If you have additional questions about bonus depreciation,
click here to send us an e-mail question.
