Depreciation/Equipment (Fixed Assets)

Make the Most of Business Equipment

When you buy capital equipment for your business, you can depreciate it over a period of time intended to approximate its useful life. You can also use first-year expensing to deduct some purchases immediately rather than depreciating them over time.

I like to give the example of a Printer that I purchase in my office for $400 from Costco. The printer itself will last greater than one year so I has to be depreciated. While the paper, ink & toner usually last less than one year and it can be expenses respectively.

Your deduction turns on the property’s asset class and business use percentage (“BUP”).

  • Asset class tells you how fast to depreciate purchases. Computers, for example, are “5-year” property, deductible over five years. The IRS publishes pages of depreciation schedules for different asset classes.
  • BUP tells you how much of your purchase to depreciate each year. If BUP tops 50%, you’ll generally qualify for “accelerated” depreciation, which lets you deduct your purchase faster. If BUP is 50% or less, or you’re subject to the AMT, you’ll generally use straight-line depreciation.

First-year expensing lets you deduct the full cost of some items the year you buy, rather than depreciating them over time:

  • You can expense up to $500,000 of “tangible personal property,” new or used (other than certain automobiles) (2013).
  • You can expense property you buy as late as December 31.
  • Your BUP must be more than 50% to qualify for expensing.
  • Your first-year expensing deduction for an activity can’t exceed your taxable net income from the activity. However, you can carry forward unused deductions to future years.
  • The deduction phases out by one dollar for each dollar of Section 179 qualifying property placed in service during the year that exceeds $2,000,000 (2013).

When you sell property you’ve depreciated or expensed, your basis is your original cost, minus depreciation, expensing, and any costs of selling. Gains are recaptured as ordinary income; losses are deductible in the year of sale.

Example: On May 1, 2013, you pay $2,000 for a computer (5-year property) to use 100% for business and deduct the full $2,000. If you later sell the computer for $1,000, you’ll owe tax on your “recaptured” $1,000 gain.