Big Deductions for Year-End Purchases.. Don’t Let Them Slip Away
In a simpler tax world that we can only imagine, the way small businesses write off major expenses would be, well, a lot simpler. You'd deduct the costs of all your major purchases in the same year you made them. In the real world — or at least the world according to Congress, which writes all of our U.S. tax laws — not much is simple.
Here are four points to remember when trying to figure out how major purchases will affect your business's tax bottom line.
- Up to $24,000 is allowed in personal property write-offs. As a small business, you can expense, or write off, up to $24,000 of business personal property in 2002. Business personal property is items like furniture, office equipment and computers. Writing off the full cost in one year is called a Section 179 election, and the election has to be made in the year of purchase.
- You have to use the property more than half the time for business to qualify for Section 179 treatment, and the deduction is proportionately reduced for anything not used solely for business. That means that if you buy a $2,000 computer and use it 75% for business, the maximum amount you can write off is $1,500.
- If you want to see how much small businesses love the Section 179 deduction, take a little time between Christmas and New Year's Day to peek inside any store that sells office furniture or equipment. Chances are you'll see lots of buyers racking up some year-end deductions.
- Note: The $24,000 maximum is reduced for businesses that buy more than $200,000 worth of personal property in a year. The reduction is dollar-for-dollar for amounts over $200,000. So, for example, if your business spends $210,000 on equipment, the maximum Section 179 write-off is $14,000.
An office building is not personal property. You'll notice that this $24,000 deduction opportunity refers to "personal property."
This is important to note; Real estate is not personal property. Nonresidential real estate, such as office or industrial properties, has to be depreciated over 39 years. And only the building qualifies for depreciation (i.e., you cannot depreciate unimproved land). Add it all up, and it means that your first-year depreciation write-off on a business building is probably going to be less than 2% of the purchase price. Sorry.
Generally, the most you can deduct for a business vehicle in the year that you buy it is $3,060. That's it. You can mess around with taking a partial Section 179 deduction and then taking depreciation on top of it, but trust me: There's no way of getting past the $3,060 limit for a passenger car. Please note that cars purchased after 9/11/2001 do qualify for an additional bonus depreciation of $3,600 bringing the maximum for 2002 up to $7,660.
However, there are — surprise! — some exceptions to this rule for vehicles that are not considered ordinary passenger cars. Most significantly, you could get to apply the full Section 179 expense deduction (assuming you had no other business equipment purchases) against the purchase of a vehicle that qualifies as a truck.
Spent more than $24,000? You could still get a larger deduction. You could wind up with more than $24,000 in equipment deductions for 2002, even with the Section 179 limit in place.
Here's how (it's complicated). Let's say you're a physician, video producer or other professional who might have to spend $50,000 in a year on business equipment that qualifies for the Section 179 deduction. You could get a write-off of $24,000 in equipment under Section 179. You also could start taking depreciation on the remaining $26,000 worth of equipment. For example, if all the purchases were made in July 2002 and were of equipment and furniture that is depreciated over seven years, the additional depreciation deduction would be about $3,715.
Confused? See your tax professional.
There are other rules and restrictions on writing off major business purchases. For example, farmers can get special treatment for certain single-purpose agricultural buildings such as greenhouses. Your Section 179 deductions can be limited by your overall taxable income from a trade or business; limitations also apply if you're reporting Section 179 expenses from multiple businesses.
Like I said, this stuff isn't simple. Talk with your CPA before year-end if you need more help with your major purchases. It could be very beneficial for you company’s tax position at year-end.