FORTUNE Small Business:

Cut your tax bill with write-offs

Depreciation bonus helps reduce your tax bill, plus what to spend now for 2008 tax relief

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)

tax_rebate.cr.03.jpg
Ask FSB
Get small-business intelligence from the experts. Here's a chance for YOU to ask your pressing small-business questions, and FSB editors will help you get answers from the appropriate experts.
Your name:
* Your e-mail address:
* Your city:
* Your state:
* Your daytime phone #:
* Your questions:

(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.  To top of page

Have you used depreciation to your advantage? Tell us how.

A quick question from FSB: For a future story, we would like to find business owners who routinely sleep no more than 4 to 6 hours per night. If you're a night-owl entrepreneur, write to Anne Fisher at afisher@fortunemail.com and tell us how you adapted to your current schedule.

Write-offs for your home business

Stop Overpaying the IRS

5 smart tax moves
Features
They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
The 13 most WTF gadgets From the weird to the gross, these 13 gadgets will make you wonder why they even exist. More
Best-loved cars in America These cars and trucks topped J.D. Power's APEAL survey, which measures how much owners like their new vehicles. More
America's most powerful cars A new 'horsepower war' has erupted among U.S. automakers and these are the most potent weapons in their arsenals. More


Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.