A Tax Planning Tip:

Bonus depreciation is about to expire.

 

Take note!  If you need to purchase additional assets for use in your trade or business, you can still get a large immediate tax benefit by making the purchase now; but at least part of that benefit will end at the stroke of midnight on December 31^st.

 

Under existing law, you may claim, as a current year expense, either 30% or 50% of the adjusted cost basis on qualified property purchased and placed in service after May 5, 2003 and prior to January 1, 2005.  This is in addition to the regular depreciation deduction, which may still be claimed.  For example, let us assume that you purchase a new piece of equipment for $100,000 which is normally depreciable over a useful life of five years.  If it were placed in service during the last three months of the year, the total depreciation expense allowance would be $5,000.  However, until December 31, 2004, you could claim a depreciation deduction on the same piece of equipment in the amount of $52,500 ($50,000 bonus depreciation plus $2,500 regular depreciation on the remaining $50,000.)

 

Of course, under a different tax code provision (Section 179), you might be able to elect to take an expense deduction of the entire $100,000.  This provision is applicable for property placed in service for tax years beginning after 2002 and before 2006.  (In other words, you will still have one more year to take advantage of this method.)  However, the right to make this election is limited by the total amount of depreciable property you place in service during the year.  If you spend more than $400,000, the available Section 179 expense is reduced dollar for dollar, until it is completely phased out when you reach $500,000 of depreciable property purchased in the year.

 

The decisions about how to properly claim depreciation expense are complicated, and should be made carefully, with the advice of a tax professional.  If you have any questions about these issues, or any other aspects of tax planning under current law, please contact your tax advisor.

 

Elizabeth S. Connolly is a 1988 graduate of Duquesne University with a B.S. degree in accounting, her public accounting career began in the audit department of Touche Ross (now Deloitte & Touche). After a number of years as the Controller for Longue Vue Club, she returned to public accounting in 1996, joining her father, Lewis Steele, in founding Connolly, Steele & Company. Her varied experience encompasses auditing and accounting, tax matters, and tax and financial planning for businesses and individuals, and business start-ups.

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