When you consider tax planning, have you considered the difference timing your deductions could make?
Suppose you need a new business computer. Depending on your circumstances you may get a better benefit if you purchase that computer this year instead of next year. Here are a few basics on depreciation and how timing matters.
General Depreciation: You must write off the cost of business assets used in more than one year over time via specific depreciation rules. For example, if you purchase a computer mid-year for $1,000, under depreciation rules you can write off $200 in the first year. If over 40% of your depreciable property is acquired in the last three months of the year you may only get a $50 write-off the first year.
Special First-Year Depreciation: Through the end of 2013 there is a special, first-year bonus depreciation allowance for new assets purchased and used in your business (note not all states allow this bonus depreciation). A new business computer purchased mid-year could provide a write off of $600 in the first year if qualified for first-year bonus depreciation. Absent of an extension, this bonus depreciation goes away beginning in 2014.
Expensing Election: When you file your taxes you can elect to expense (under IRC section 179) rather than depreciate certain property on Form 4562, Depreciation and Amortization. For 2013 you can elect to expense up to $500,000 (subject to phase out when property placed in service exceeds $2MM). Absent extension, this write off is capped to $25,000 with a phase out beginning at $200,000 for 2014 and thereafter. You cannot create or increase a loss by electing to expense rather than depreciate your property.
Additional information can be found from various sources including IRS Publication 946, How to Depreciate Property.
Article written by Richard R. Dahl, a CPA and Senior Tax Manager with Security National Life Insurance. The content of this article is not intended as tax advice and cannot be used for avoiding tax penalties or promoting or recommending any transaction. Individual circumstances should be discussed with a qualified tax professional.