Expensing deduction: Boon for small business owners
Small business owners who purchased business equipment or other capital assets that were put into service in 2004 may qualify for a large tax deduction. According to the Wisconsin Institute of Certified Public Accountants (WICPA), this is the result of Uncle Sam extending tax rules that have significantly increased the small-business expensing limit.
Depreciation versus expensing
Typically, business property must be depreciated over a number of years, since the asset's usefulness to the business extends beyond the year it was purchased. Using the depreciation schedules, it can take many years for small business owners to fully realize the tax deduction.
Under the Section 179 expensing allowance, small businesses that qualify may expense – that is, deduct – up to 100 percent of the cost of most business property in the year it is put into service, rather than recovering the cost through depreciation deductions. The election is made on Form 4562 attached to your original tax return.
Property that may be expensed includes machinery and equipment, such as printing presses or refrigerators, furniture and fixtures, and off-the-shelf computer software. (Off-the-shelf software is software that is readily available for purchase by the general public and has not been substantially modified.) Qualifying property may be new or used.
Expensing limits
Business owners, including those working in a sole proprietorship, partnership or corporation, can choose to expense up to $102,000 of qualified business property on their 2004 tax returns. This is a significant tax break, considering that the 2002 limit was only $24,000.
The Jobs and Growth Tax Relief Reconciliation Act of 2003 hiked the expense limit to $100,000, providing for inflation increases. For 2005, business owners can opt to expense up to $105,000 of qualified business equipment costs.
If you acquire and place in service more than one item of qualifying property during 2004, you may allocate the Section 179 deduction among the items in any way, as long as the total deduction is not more than $102,000.
Phase-out rules apply
The maximum annual expensing amount is reduced dollar-for-dollar when the cost of eligible property put into service during the year exceeds $410,000 in 2004 and $420,000 in 2005. If the cost of your Section 179 property placed in service is $512,000 or more in 2004 or $525,000 or more in 2005, you cannot take a Section 179 deduction. These limits are intended to keep the expensing election targeted to small businesses.
The above information is from the Wisconsin Institute of CPAs, the premier professional organization for Wisconsin CPAs, with more than 8,300 members in public accounting, industry, government and education, including Kosler & Company, S.C.
Thursday, July 29, 2010