Do your eyes glaze over at the thought of those mind-numbing depreciation rules? Well, take heart, small business owner. Thanks to a tax law known as Section 179, you can probably kiss those depreciation rules good-bye.
Depreciation is the name we use for deducting the cost of business assets such as office equipment and furniture (computers, printers, fax machines, copiers, desks, bookcases, etc) and other items that the tax code says have a “useful life” of more than one year.
The general rule for many decades was this: the cost of such business assets (aka fixed assets, capital assets, depreciable assets) cannot be fully deducted in the year of purchase. Instead, the purchase price must be deducted over several years (anywhere from 3 years to 39.5 years), depending on the type of asset.
Then along came Section 179, which says that the total cost of certain business assets can be fully deducted in the year of purchase. There are several important conditions that must be met to take advantage of Section 179, but for the most part, sole proprietors who purchase things like the office equipment and furniture listed above can simply forget about depreciation and deduct 100% of the purchase price.
Some of those conditions include these special rules:
1. Generally speaking, personal property can be deducted via Section 179. Most real estate does not qualify.
2. For 2014, the maximum amount of the Section 179 deduction was $500,000. For 2015, as of this writing, the maximum Section 179 deduction is $25,000. Hopefully legislation will be passed that increases the deduction amount back to the 2014 level!
3. When it comes to depreciation and/or Section 179, vehicles have their own set of special rules.
4. The Section 179 deduction cannot create or increase a loss in your business.
These special rules can be tricky, so if you have any questions about qualifying for Section 179, be sure to consult with a tax professional or check out IRS Publication 946, How To Depreciate Property.
So, if the only business assets you purchase are things like office equipment, and you purchase less than $25,000 of those assets (or $500,000 if Washington passes legislation to return to the 2014 maximum), you can deduct the full cost and ignore the depreciation rules. And you’ve just simplified your tax return considerably, because you don’t have to wade through all the possible methods of depreciation and keep track of those calculations for several years.
Schedule C filers report the Section 179 on Line 13 — Depreciation and section 179 expense deduction. But you must also complete Form 4562, Depreciation and Amortization to report the details on the business assets that qualify for the Section 179 deduction. Part I of Form 4562 is devoted to the Section 179 deduction, so be sure to read up on how to complete this part of the form. The total Section 179 deduction is then transferred from Form 4562 to Schedule C, Line 13.
Partnerships and corporations can also take the Section 179 deduction and must also use Form 4562 to report the Section 179 assets.
Even with the additional tax forms, the Section 179 deduction is a great way to maximize your deductions. Be sure to take advantage of it.