Tax Tip from the week of June 16, 2008

What you may not know about this deduction

It's a silent deduction, but valuable, and so common you might forget how complex it can be. What is it?

The answer is "depreciation," and here are two of the tax rules for deducting depreciation that you may not be aware of.

1. Not all assets are eligible for immediate expensing. The Section 179 depreciation election lets you write off the cost of qualifying property in the current year. For 2008, the amount you can expense is generally as much as $250,000. The figure can be higher in special circumstances.
   
   But Section 179 only applies to new or used assets you acquire for use in your trade or business.
   
   Even if you meet that requirement, some property — including buildings, land improvements (such as fences or swimming pools), and air conditioning and heating units — is not considered qualifying property. That means no Section 179 deduction, though you can claim depreciation under other methods.
   
   In addition, the Section 179 deduction is limited on certain business vehicles.
   
   
2. Forgoing depreciation deductions can backfire. You may have heard of recapture. The tax term applies when you sell a business asset, and the effect is to take back, or recapture, some of the benefit of the depreciation deductions you claimed or were entitled to claim during the time you owned the asset.
   
   Why does recapture apply if you don't take the deductions in the first place?
   
   The reason has to do with another tax concept known as allowed or allowable. Depreciation you actually deducted is allowed. Depreciation you could have deducted — whether you did or not — is allowable.
   
   Under the rules, you generally have to adjust the property's basis by depreciation that is either allowed or allowable.

Please contact us if you're considering buying or selling business property or equipment and have questions about the depreciation rules that apply.