J.K. Lasser's Small Business Taxes 2012 by Barbara Weltman

Author:Barbara Weltman
Language: eng
Format: epub
ISBN: 9781118176467
Publisher: Wiley
Published: 2011-09-29T00:00:00+00:00

Chapter 14

First-Year Expensing, Depreciation, Amortization, and Depletion

First-year expensing, which is also called the Section 179 deduction after the section in the Tax Code that creates it, is a write-off allowed for the purchase of equipment used in your business. This deduction takes the place of depreciation—the amount expensed is not depreciated. For example, if you buy a used computer for your business for $2,500, you can opt to deduct its cost in full in the year you place the computer into service. If you don't make this election, you must write off the cost over a number of years fixed by law.

Depreciation is an allowance for a portion of the cost of equipment or other property owned by you and used in your business. Depreciation is claimed over the life of the property, although it may be accelerated, with a greater amount claimed in the early years of ownership. The thinking behind depreciation is that equipment wears out. In theory, if you were to put into a separate fund the amount you claim each year as a depreciation allowance, when your equipment reaches the end of its usefulness you will have sufficient funds to buy a replacement (of course, the replacement may not cost the same as the old equipment). To claim a depreciation deduction, you do not necessarily have to spend any money. If you have already bought equipment, future depreciation deductions do not require any additional out-of-pocket expenditures. For 2011, there is a special depreciation allowance called bonus depreciation.

Amortization is conceptually similar to depreciation. It is an allowance for the cost of certain capital expenditures, such as goodwill and trademarks, acquired in the purchase of a business. Amortization can be claimed only if it is specifically allowed by the tax law. It is always deducted ratably over the life of the property. As you will see, amortization is also allowed as an election for some types of expenditures that would otherwise not be deductible.

Depletion is a deduction allowed for certain natural resources. The tax law carefully controls the limits of this deduction.

In this chapter you will learn about:

First-year expensing

Other expensing opportunities

General rules for depreciation

Modified Accelerated Cost Recovery System (MACRS) depreciation

Bonus depreciation

Limitations on listed property

Rebuilding incentives for certain disaster victims

Putting personal property to business use

Amortization

Depletion

Where to claim depreciation, amortization, and depletion

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