When you buy new equipment for your small business (machines, computers, automobiles, telephone systems,
furniture, fixtures, etc.), you generally will not write off the cost of these items right away.
Instead, you depreciate the item, which means that you allocate or write off the cost of those
purchases over a set period of time.
Business Equipment
Most business equipment is depreciated over 5 years (computers, automobiles, copiers) or 7
years (furniture and most other machinery) under a method called the modified accelerated cost
recovery system, or MACRS. Depending on the recovery period, MACRS
applies specific percentages that permit you to recover or write off more costs in the earlier
years of ownership.
Special rules apply to the depreciation of passenger automobiles. Generally, depreciation is
limited to something less than the MACRS percentages.
Different recovery periods and methods apply to transportation equipment, real estate, and other
kinds of property. For detailed information on MACRS, see
IRS Publication 946, How to Depreciate
Property.
Section 179 Deduction
The Section 179 tax deduction benefits businesses that have property with a useful life of more than
1 year. Although generally the depreciation of the property is spread across many years, a sole
proprietorship, corporation or partnership can elect to receive the federal income tax benefits in 1
year. This is possible through the Section 179 tax deduction.
- The maximum deduction you can elect for qualified section 179 property placed in service in 2007 is $125,000.
- This limit is reduced by the amount by which the cost of qualified property placed in service during the tax year exceeds $500,000.
- The Section 179 property definition includes purchased (i.e. off-the-shelf) software.
For a list of eligible property, consult
IRS Publication 946, How to Depreciate
Property.
GO Zone Bonus Depreciation
- A 50% additional first-year depreciation deduction is available for certain property placed
in service in the Gulf Opportunity (GO) Zone.
- Qualified property must be purchased and placed in service from Aug. 28, 2005, through
Dec. 31, 2007 (Dec. 31, 2008, for qualifying real-estate property).
- The Section 179 tax deduction allowed for qualified GO Zone property is $208,000. The
phase-out threshold is $1,030,000.
Write-offs Exceeding Net Income
The Section 179 deduction cannot be more than all of your business taxable income from all
sources, including wages. Any excess tax deduction may be carried over to future years until
it is depleted.
If the rest of your depreciation expense (other than the Section 179 deduction) exceeds
your income, you will have a net operating loss (NOL). If you cannot absorb the NOL on
your current tax return, you may carry the loss back for 2 years (that is, use the NOL
to offset earlier years' taxable income) and/or forward up to 20 years.
Other Things to Consider
- If you forego the extra first-year write-offs, do you lose them?
No. You are choosing to allocate more of the write-off of your equipment's cost to future
years, when it may be more beneficial.
- Do you have enough income to cover the Section 179 tax deduction and the bonus depreciation?
Section 179 carryovers, NOLs, carry-backs and carry-forwards create complications on your
federal income tax return, including, but not limited to additional paper work, tricky calculations, and
additional tax preparation fees.
- Are these complications worth it?
Perhaps. There is no hard and fast rule to determine the best depreciation decision for
your small business. You'll need to consider past, present and estimated future income. Your tax
professional can help you to make the best choice.
