Cut your tax bill with write-offs

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(FORTUNE Small Business) -- Dear FSB: I keep hearing about depreciation. As an IT consultant and single-member LLC, I buy a fair amount of computer hardware and some software, which can lose its value very quickly. Can I take advantage of depreciation to reduce my tax burden related to these expenses?

- Randy Weinstein, New York

Dear Randy: Depreciation allows businesses to write off the cost of income-generating assets over a period of time. The fact that you are a single-member LLC shouldn't affect your ability to progressively deduct the cost of business assets like computer hardware or software from your taxable income.

Factors such as the type of property and whether what it is for personal use or business use determine how much depreciation you can claim.

Depreciation is usually governed by the Modified Accelerated Cost Recovery System (MACRS), which provides a schedule for how different assets should be written off. Computer hardware is assigned a five-year life, says Rick Thompson, a partner with the certified public accountants and advisors practice at Sikich LLP. Off-the-shelf software is usually amortized over three years.

"There are specific rules for computer software depending on whether it has been developed internally, purchased as part of the hardware, or has a specified life (as) per a license agreement," explains Grafton 'Cap' Willey of accounting and consulting firm Tofias PC.

This year's depreciation bonus

Apart from these rules, you may be eligible for a special depreciation bonus this year. Under the government's economic stimulus package, you can immediately depreciate 50% of the cost of certain business equipment bought this year, and write-off any remaining cost as per the MACRS schedule.

Depreciation isn't the only tool you have to reduce your tax burden. Under the provisions of Section 179 of the IRS code a small-business owner may be allowed, to deduct, in full, the cost of property in the year it is placed in service, says Michael Kalifeh of accounting firm Thomas Howell Ferguson P.A.

Section 179 also comes in for some bonus action under the stimulus plan in 2008, so plan now. The maximum allowed deduction goes from $128,000 before the change to $250,000 for the tax year beginning in 2008, according to a tax-planning letter distributed by Sikich. The government has also raised the ceiling on what purchases qualify for section 179. In 2008, companies with a capital expenditure of up to $800,000 can avail themselves of the facility, up from a limit of $510,000 previously.