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Depreciation & Your Business

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.



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.



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.



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.



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. 

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