John Bullis: Claiming a depreciation expense

Depreciation is a tax savings expense for business owners. The cost of purchasing fixed assets (building, equipment, furniture, etc., but not land) can be claimed as a tax deduction in many ways.

The old standard way was to claim the cost of the item over the Internal Revenue Service estimated life. For example, if the equipment cost $10,000 and the estimated life is 7 years, according to the IRS tables, then the depreciation expense could be $1,428 or so each year.

Both used and new tangible personal property (equipment being an example) can be claimed as the full cost amount in the year purchased and placed in service, if the Section 179 election is made. This year, Congress allows up to $500,000 in Sec. 170 deductions, if the total items purchased is not more than $2 million.

Recently Congress extended the Sec. 179 election to computer software that is purchased “off-the-shelf”.

There are certain rules and limitations, but if the total Sec. 179 deduction is not allowed in the current year, the excess carries over to future years as a deduction then.

The choice of doing the Sec. 179 election or not, or only for some items, is made by the taxpayer. A correction of prior year elections for open years (last 3 years or so) can be done on an Amended Return.

But like the TV commercial says “wait, there’s more”. Congress also allows the 50 percent bonus depreciation for new business equipment and personal property purchased and put in use in 2013. The item must have an estimated useful life per the IRS tables of 20 years or less. It must be new, this is not available for used personal property. The original use has to begin with the taxpayer claiming the 50 percent bonus depreciation. It has to be placed in service by Dec. 31.

Special rules also apply for the bonus depreciation election. It also can be done for certain qualified leasehold improvements. New vehicles have special rules and limits of only $8,000 of bonus depreciation on a passenger car in 2013. With the regular depreciation on a car, the total depreciation in 2013 might be $11,160.

The taxpayer can “elect out” of this special 50 percent bonus depreciation for any class of property. If the Alternative Minimum Tax applies, electing out of the deduction may be beneficial.

Depreciation expense can be used to give more deductions now, but you can’t take more than the total cost over the useful life. Later years will get reduced expense deductions. Business owners should be looking at the depreciation elections.

Did you hear? “Hindsight is always 20/20.”

John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.