Expensing Deduction is Boon for Small Business Owners

Entrepreneurs

Expensing Deduction is Boon for Small Business Owners

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 $112,000 of qualified business property on their 2007 tax returns. For 2008, business owners can opt to expense up to $128,000 of qualified business equipment costs.

If you acquire and place in service more than one item of qualifying property during 2007, you may allocate the Section 179 deduction among the items in any way, as long as the total deduction is not more than $112,000.

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 $450,000 in 2007. If the cost of your Section 179 property placed in service is $562,000 or more in 2007 or $638,000 or more in 2008, you cannot take a Section 179 deduction. These limits are intended to keep the expensing election targeted to small businesses.

EXPENSING DEDUCTION LIMITED FOR SUVs
Despite the higher expensing allowance mentioned above, taxpayers who purchased or plan to purchase large sports utility vehicles (SUVs) for business use are subject to limitations. Vehicles weighing not more than 14,000 pounds are allowed a first-year depreciation deduction of up to $25,000 when used for business. Only trucks and vans that have been modified in such a way that it is not likely the vehicle will be used for personal purposes are eligible for the higher expensing allowance.

PLAN BUSINESS PURCHASES
Understanding how to maximize the expensing deduction is critical to the successful financial management of a small business. Your CPA can work with you in making the decision to expense rather than depreciate the cost of your business property and explain how and when to use the expensing deduction to make necessary purchases of business property.

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