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The Center for Financial, Legal & Tax Planning, Inc. |
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Advisories
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Depreciation and Your Business – A Helpful Guide Depreciation
is the enigma of the business and accounting world. Oftentimes, a business will use one method
of depreciation for its books and a second method for tax purposes. This creates the necessity to maintain two
sets of records. There is also the
problem (which turns out to be a good thing) of the first-year deduction
allowed in the year of acquisition over and above the normally allowed
depreciation deduction, which affects the basis of the assets on both sets of
books. Additionally, classifying an
asset in its applicable category and determining its proper “taxable” useful
life is often a troubling adventure.
As a business owner, you may have a better grasp of how long a
particular piece of equipment will last; however, the IRS has a more
regimented useful life system to apply to particular assets. As a result, for tax purposes, you may be
continuing to depreciate an asset past its “business” useful life unless it
has been disposed and removed from all records of the business. Following is a brief discussion of the new
depreciation rules. Economic Stimulus Bill of March 2002 Prior to the 2003 tax law, the Job Creation and
Worker Assistance Act
of 2002 provided for a 30% “write-off” of a new asset’s cost, purchased after
September 10, 2001 and before September 11, 2004 (and placed in service by
January 1, 2005). The remaining 70% is
recovered under usual depreciation schedules.
This allowance is only available for new property that has a recovery
period of 20 years or less, on property that is depreciable under MACRS, and
after the reduction by any Section 179 allowance. This provision is voluntary and taxpayers can
elect not to take advantage of the bonus depreciation. Per the act, if you filed your 2001 tax
return before June 1, 2002 and did not claim the bonus depreciation, then you
are already deemed to have elected not to take advantage of the bonus
depreciation. If this is the case, you
can file an amended return before the next tax return is due (including extensions)
and attach a copy to the next year’s tax return to make the election to use
the bonus depreciation. Economic Stimulus Bill of May 2003 The Jobs and Growth Tax Relief
Reconciliation Act of 2003 provides an increase of the bonus depreciation
from 30% to 50% for purchases after May 5, 2003 that are
placed in service before January 1, 2005.
Therefore, for assets purchased in April 2003, you can only use the
30% “write-off”, as mentioned above, and for assets purchased after May 5,
2003, you can use either the 30% or 50% “write-off”, pending on the election
made by the taxpayer not to use the 50% bonus depreciation. Talk about
confusing, read on! An additional change regarding depreciation as a
result of the new tax law is the increase of Section 179 expense from $25,000
to $100,000 for all purchases after 2002 and before 2006. The phase-out threshold has also increased
from $200,000 to $400,000, and both the deduction and the phase-out will be
adjusted based on inflation beginning after 2003 and before 2006. What this means is that you can expense an
asset and forget the bonus depreciation, or record the asset and take the
bonus depreciation, or if you want, you may be able to do both. Expensing Business Assets Under Code Sec. 179 If
you own your own business, you are allowed to “write-off” up to $100,000 of
the cost of depreciable personal property that you place in service before
2006. You can write off computers,
faxes, office machines, file cabinets and other equipment, without
capitalizing and using a depreciation method.
This provision is reduced dollar for dollar by the cost of property
placed in service during the year in excess of $400,000 for tax years before
2006. Those amounts that are
disallowed are not eligible to be carried over to future periods. Additionally, the provision is only allowed
to the extent of taxable income. For
example, if you own a business that has net income before any Section 179 deduction
of $13,000, you may reduce the net income to zero by the deduction of $13,000
and the balance of $87,000 ($100,000 - $13,000) is allowed to be carried over
for use in future periods. Concluding
Remarks
As can be seen from the above, the concept of
depreciation had become very complex over the past few years. The objective of the tax law changes is to
allow business to deduct the cost of equipment faster than in the past. If you have any questions, call The Center
and ask for any one of the professionals to assist you. (03-07) To receive the Advisory by e-mail,
please send your address to lacie@taxplanning.com |
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The Center for Financial, Legal and Tax Planning,
Inc. 4501 W. (618)
997-3436 Fax: (618) 997-8370 © Copyright 2005. All rights reserved. |
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