Depreciation and Section 179 Deductions can be a challenging aspect of one's business accounting and tax return. The regulations regarding these deductions can be complex. Despite the complexity, general definitions and rules are provided below:
Depreciation defined
Depreciation - for assets with a useful life of greater than 1 year, an annual depreciation expense is available for each year of an asset's useful life. Assets would include office furniture, vehicles, buildings, intangible assets, machinery, tools, etc. Each one of these assets has a recovery period (useful life) for which an expense can be taken. Below are examples of various assets and their recovery periods per the IRS:
Office furniture 7 years
Automobiles 5 years
Appliances 5 years
Residential Rental Prop 27.5 years
Computers 5 years
Normally, these assets would be depreciated over its recovery period. For example, an appliance costing $2000 and depreciated over 5 years would experience a $400 deduction each year for 5 years.
Section 179 defined
Section 179 deduction - refers to expensing an asset on one's tax return in its first year (deducting its entire cost) rather than depreciating it over its useful life. The IRS provides guidelines on when this is permissible and what the limitations are. You can find information on Section 179 and other depreciation information here.
The use of 179 deduction for an asset in its first year is illustrated below in a simple example to reflect tax savings:
Purchase of asset:
Office computer $5000 (Purchased 1/1)
First year depreciation 1000 (5 year property)
179 Deduction 5000
The 179 Deduction provides tax savings of: 5000
.22 (tax bracket)
1100 Tax savings
For businesses with frequent turnover of assets, a strategy of when to use Section 179 with asset purchases and when not to use it can provide optimal tax savings over the long term. However, a point should be made regarding 179 deduction: if an asset has been expensed using Section 179 and it is disposed (sold, donated to a charity, given away, etc) before its useful life has passed (example: a computer disposed of before 5 years when it had been expensed by 179), the item is subject to depreciation recapture. This means the item needs to recapture the depreciation taken before it would have been fully depreciated had it not been expensed with 179. The recaptured depreciation is added back on one's tax return in the year of disposal.
Handling depreciation expense for a business can be challenging. Let LFC help your business work with you in determining a strategy for your fixed assets. Use the Contact Us or Set Appointment feature on this blog to schedule a time.
