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Small Business and Bonus Depreciation

Updated on January 1, 2012
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Keith Schroeder writes The Wealthy Accountant blog with 30 years experience in the tax field. He is the tax adviser of Mr. Money Mustache.

How Depreciation Works

I think a lot of people are missing bonus depreciation in their tax planning. Let’s look at how it works in two examples.

First some background. A business can expense up to $250,000 per year of depreciable assets placed in service during the year. The $250,000 ceiling on expensing is reduced dollar for dollar once assets placed in service exceed $800,000.

For our first example, XYZ, Inc. purchases new equipment in June 2009 for $50,000. Let’s assume XYZ is unable to expense the asset. For 2009, 50% can be taken as bonus depreciation and 20% using regular depreciation on the remaining half. This is a 70% deduction in the first year.

Our second example is a new vehicle with a loaded weight over 6000 pounds, purchased for $50,000. The company can expense the maximum allowed for vehicles: $25,000. Bonus depreciation on the remaining $25,000 is 50%. Regular depreciation applies to the last $12,500 at 20%. In our example, a full 80% deduction ($40,000) is depreciated the first year.

There are some additional points to consider. Not all states are following federal rules on bonus depreciation, requiring separate depreciation schedules for future years. Because tax rates are likely to rise over the next several years, you need to review your tax plan for total tax savings over multiple years; high-incomers need to pay special attention.

Partnerships get an income tax deduction for expensed assets, but still pay self employment taxes on the expensed amount; regular and bonus depreciation are not taxed for income or self employment. As a result, many partnerships will find bonus depreciation the preferred route to go.

You can elect out of bonus depreciation. If your income is low and likely to rise in future years, electing out could benefit you.

Bonus depreciation applies to assets with a class life of 20 years or less. No, you can’t buy a rental property and depreciate 50% the first year.

The Kiplinger Tax Letter thinks bonus depreciation will be extended into 2010. Stay tuned.

Consult your friendly accountant should you need further help planning your tax situation.


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