How To Avoid Those Mind-boggling Depreciation Rules

Tired of dealing with those complex depreciation rules? Thanks to recent tax law changes, here's how to avoid them completely while benefiting from a lucrative small business tax break that not only puts money in your pocket, but also makes the filing of your income tax return much simpler. What am I talking about? It's called the Section deduction, and if there's one tax law you need to understand, this is it. Here's why: The Section deduction enables the Small Business Owner to "expense" (i.e. deduct in the current year) up to $, of the cost of most business equipment, rather than use those stingy depreciation rules that require you to write-off the cost over five or more years. What's so great about that? Think about it like this: I've got a dollar and I'd like to give it to you. You have two choices -- I give it to you now, or I give it to you years from now. Which do you prefer? Obviously, you'd rather have it now, right? And why is that? Because of what you learned way back in Finance : something your banker calls "the time value of money." I'll spare you a boring textbook definition. Instead, let's just assume we agree on this simple point: Is a dollar worth more today or years from today? It's worth more today. And that's why the Section deduction is so valuable. Huh? Let's use an example to bring all this financial theory into reality. You buy $, worth of office equipment in . Under normal depreciation rules, you wouldn't get to take a deduction for $, in . Instead, you'd write off the $, over years -- part in , part in , etc. If you're in the % tax bracket, you get your $, in tax savings over years. Yawn. That's a long time! You'd get your deduction, and the resulting tax savings, but you'd have to wait years to realize all the benefits. Section says that if you meet certain requirements, you can deduct the full $, in . You reduce your taxes by $, in Year . So let me repeat my rhetorical question: Uncle Sam has $, he'd like to give you. When do you want it? All at once, or spread out over years? That's the beauty of Section . But you have to meet certain requirements to benefit from Section . One requirement concerns the total amount of equipment you can deduct rather than depreciate. In , the amount was $,. And for , the amount was originally set at $,. Then Congress and the President passed a new tax bill in late May that raised that amount to a whopping $,. And since that $, is adjusted for inflation each year, the maximum Section deduction amounts have been increasing: Year -- $, Year -- $, Year -- $, Never liked depreciation? Well, you can pretty much kiss it good-bye now. One final note: A few other requirements must be met to claim the Section deduction. Here's a brief, but not comprehensive, overview: . Most personal property used in a trade or business can be deducted via Section . Real property cannot. Typical examples of personal property include: office equipment such as computers, monitors, printers and scanners; office furniture; machinery and tools. Real property means buildings and their improvements. . The $, amount (adjusted for inflation) can be used through . In , unless new legislation is passed, the amount goes back down to $,. . There are special rules regarding the application of Section to the purchase of business vehicles. For example, the special "SUV rule" that allowed , LB vehicles to be fully deducted (up to the $, amount) was recently changed to $,, effective October , . . Your total Section deduction is limited to the business' annual profit. In other words, you cannot use the Section to create or increase a loss. This is known as the "taxable income limitation." For "C" Corporations, this limitation is very cut and dried. But if your business is an "S" Corporation, Partnership, LLC, or Sole Proprietorship, it may not be as limiting as it seems. For these non-"C" Corp businesses, the Section deduction can be used to offset both business and non-business income. And if you're married filing jointly, the Section deduction can offset your spouse's income, including W- income. Example: You start a new business in that ends up with a loss for the year of $, (before taking the Section deduction). Your spouse has W- income of $,. Even though your business is unprofitable, you can still take the full Section deduction of $, (again, assuming your business is an entity other than a "C" Corporation). Be sure to consult with your tax professional to get the scoop on all the Section rules.