Did you know that if you buy a new computer (new office furniture, new copier, etc) for your business between now and Dec 31st, you can deduct the whole purchase price on this year’s tax return?
One of the big tax mistakes business owners make is not taking full advantages of the tax laws as they relate to these purchases. When they buy business equipment, most expect they will have to deduct (or “depreciate”) that purchase over several years. But it’s also possible to use first-year expensing to deduct the full cost of equipment in the year you buy it, rather than spreading out the cost of ‘wear and tear’ of the asset over several tax years.
Here’s how “first-year expensing” works:
- You can expense up to $25,000 of “tangible personal property,” new or used. This can include cash registers, printers, copiers, computers, office furniture, servers, phone systems, tools, manufacturing equipment, even heavy machinery.
- In previous years, Congress has used “tax extender” legislation to increase the $25,000 limit to as much as $500,000; don’t be surprised if they do the same for 2015.
- Vehicle purchases are handled differently than the other business equipment listed above. There are specific dollar limits, depending on the type and weight of the vehicle. Deductions of up to $25,000 are possible in the first year however, for some (but not all) vehicles weighing over 6,000 pounds.
- You can expense property you buy as late as December 31.
- Your “business use percentage” (BUP) must be more than 50% to qualify for first-year expensing. in other words, that new laptop must be used for business more than 50% of the time in order to write-off the entire purchase price this year,
- Your first-year expensing deduction for an activity can’t exceed your taxable net income from the activity. For example: If your net income is $15,000, you cannot purchase $16,000 worth of manufacturing equipment and deduct the entire amount this year. However, you can carry forward unused deductions to future years.
ANCHOR ON THIS: If this is a big income year for your business, then deducting the entire purchase price of new equipment on this year’s tax return can be advantageous. On the other hand, if your business is fairly new, and you expect income to increase significantly in the next few years, it may make more sense to take a smaller deduction this year, and spread the bulk of your depreciation expense over the next 3-5 years, when it can shelter more income from the IRS.
Read IRS Publication 946 for details on “first year expensing”, also known as the “Section 179 deduction.” Or consult an Enrolled Agent (a tax professional whose certification comes from the US Treasury) to determine the best approach for your particular situation. Click here to set up a free consult with me: https://www.vcita.com/v/jim.flauaus