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Accelerated Depreciation for Business Tax SavingsBy Pierre Mouchette | Real Property Experts LLC
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Section 179 of the IRS Code was enacted to help small businesses by allowing them to take a depreciation deduction for certain assets (capital expenditures) in one year, rather than depreciating them over a longer period (useful life). The form used to report information for a Section 179 deduction is IRS Form 4562. This form collects information on business property acquired and put into service. Business property that qualifies for the Section 179 deduction
Accelerated Depreciation, How Does It Work?
Accelerated Depreciation - is an important concept for business owners to understand. While it is complicated, the business owner should understand the basics of accelerated depreciation, and how they can save by using it.
Ordinary (un-accelerated) depreciation is also called "straight-line" depreciation because the depreciation expense is the same each year. Depreciation spreads the expenses of an asset over its useful life. The IRS allows accelerated depreciation, which puts most of the expense of the asset in the first years it is used. Section 179 deductions are an example of accelerated depreciation provisions set up by the U.S. government to encourage expenditures on capital assets.
Section 179 Deductions and Bonus Depreciation
In recent years, two types of accelerated depreciation have been allowed by U.S. law. You can accelerate deductions on business asset purchases through the following:
How to Accelerate Depreciation
The IRS currently requires businesses to use the MACRS system for accelerated depreciation, in which asset classification determines the depreciation period. The two most common methods of accelerating depreciation are "sum of the years digits" and "double declining balance."
For current tax or legal advice, please consult with an accountant or an attorney since the information contained in this article is not tax or legal advice and is not a substitute for tax or legal advice.
- Must be tangible, depreciable, personal property which is acquired for use in the active conduct of a trade or business. Land and buildings are not qualified property.
- Is property that is purchased and put into service, in the year in which you claim the deduction. Putting an asset into service means that you have it set up and working and you are using it in your business.
- A permanent $500,000 limit on Section 179 deductions will allow businesses to plan for asset purchases, and expense purchases immediately, instead of depreciating over a period.
- A five-year extension of bonus depreciation as an incentive to businesses for purchasing new equipment. The bonus depreciation amount is 50% for 2017 and reduced to 40% for 2018 and 2019.
Accelerated Depreciation, How Does It Work?
Accelerated Depreciation - is an important concept for business owners to understand. While it is complicated, the business owner should understand the basics of accelerated depreciation, and how they can save by using it.
Ordinary (un-accelerated) depreciation is also called "straight-line" depreciation because the depreciation expense is the same each year. Depreciation spreads the expenses of an asset over its useful life. The IRS allows accelerated depreciation, which puts most of the expense of the asset in the first years it is used. Section 179 deductions are an example of accelerated depreciation provisions set up by the U.S. government to encourage expenditures on capital assets.
Section 179 Deductions and Bonus Depreciation
In recent years, two types of accelerated depreciation have been allowed by U.S. law. You can accelerate deductions on business asset purchases through the following:
- Section 179 Deductions - can be used for both equipment or vehicles and purchased (off-the-shelf) computer software. Vehicle Requirements for Section 179 Deductions
- The IRS says the vehicle must be "a 4-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, or highways, that is rated at more than 6,000 pounds gross vehicle weight and not more than 14,000 pounds gross vehicle weight."
- The $25,000 limit applies to vehicles that are: designed to seat more than nine persons behind the driver's seat, equipped with a cargo area (either open or enclosed by a cap) of at least six feet in interior length that is not readily accessible directly from the passenger compartment, or that has an integral enclosure fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver's seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.
- Additional requirements for the vehicle are the SUV must be new, not used; you can only deduct the business use of the vehicle, not personal use; you cannot deduct more than your business net income for the year.
- Your business can spend up to a maximum of $2 million on Section 179 equipment. The deduction is reduced above this amount. If you deduct only part of the cost of qualifying property as a section 179 deduction, you can generally depreciate the cost you do not deduct.
How to Accelerate Depreciation
The IRS currently requires businesses to use the MACRS system for accelerated depreciation, in which asset classification determines the depreciation period. The two most common methods of accelerating depreciation are "sum of the years digits" and "double declining balance."
- Under double declining balance - the asset is depreciated twice as fast as under straight line. (An example of this would be 10-percent of the cost is depreciated each year using straight line. Doubling the rate would mean that 20-percent would be depreciated each year, so the asset would be fully depreciated in five years, rather than ten.)
- Under sum-of-the-years-digits - the asset is depreciated faster than straight line but not as fast as declining balance. (An example of an asset with a five-year useful life is: Adding up the digits would be 5+4+3+2+1 or a total of 15. The first year, 5/15 is expensed; the next year 4/15 is expensed, and so on. If the asset's cost is $1000, 5/15, or $333.34 would be expensed the first year, $266.67 the second year, and so on.)
For current tax or legal advice, please consult with an accountant or an attorney since the information contained in this article is not tax or legal advice and is not a substitute for tax or legal advice.
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RPE Category (Digital Digest)
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REAL ESTATE | REGULATIONS | Government / Taxation | Depreciation
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PUBLISHED:
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February 26, 2021
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