What you need to consider before year-end
The I.R.S. has introduced an amendment to the Jobs and Growth Tax Relief Reconciliation Act of 2003. As a small business owner, it’s in your best interest to understand what some of these temporary regulations can mean to your bottom line.
One-time 50% special depreciation allowance
You may be able to claim an additional 50% special depreciation allowance for qualified property acquired and placed in service after May 5, 2003 and before January 1, 2005. The special depreciation allowance applies only to the first year you placed the property in service. This is an additional deduction you can take after any Section 179 deduction. (Explained below.)
Increased Section 179 deduction limit
The maximum amount you can deduct, or expense, on part or all of the cost of certain qualifying property has increased from $24,000 to $100,000. This is known as the Section 179 deduction. This could mean considerable tax savings as opposed to traditional depreciation deductions. Of course, you can still claim depreciation deductions in later years but you must depreciate the remaining cost by whatever special allowance or section 179 deduction you took.
Here’s an example
In December of 2004, you buy and place in service a qualifying property which costs $200,000. You choose to deduct $100,000 of the property’s cost as a section 179 deduction. Then, you use the remaining $100,000 to figure your special depreciation allowance of $50,000. The remaining $50,000 is applied to regular depreciation deductions in 2005.
Qualifying property
Keep in mind: Qualifying property must be used at least 50% for business in the first year it is placed in service. Here are some examples of qualifying property:
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Machines, equipment, furniture
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Agricultural or horticultural structures
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Business vehicles with a gross vehicle weight over 6,000 pounds
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Recently added: Off-the-shelf computer software. That is, software readily available for purchase by the general public and not substantially modified.
Because you can take the deduction doesn’t mean you should
Taking the Section 179 election may not be in your best interest. For example, it could prevent you from fully using deductions, reduce your coverage under the social security system and more. Make sure you understand how best to depreciate your property. If you need help, contact the Internal Revenue Service and refer to Publication 946 “How to Depreciate Property.”
