UNDERSTAND THIS DEPRECIATION RULE WHEN BUYING ASSETS
You’re already aware that depreciation expensing techniques help reduce
federal taxes when you purchase business assets such as autos, machinery,
equipment, and furniture at year-end. But did you know that might not be as
true this year as it once was?
Here’s why. Some immediate expensing depreciation tax breaks have been
reduced for 2015. For example, the Section 179 election is $25,000 this year,
down from $500,000, and the “first-year bonus” 50% depreciation deduction was
eliminated. Congress could retroactively restore more generous depreciation
rules and limits before year-end, so you’ll want to plan with flexibility in
mind, while taking note of some older rules that could affect your
deductions.
For example, as you contemplate asset purchases, think about the “midquarter” depreciation convention. This rule is designed to prevent a more
generous standard depreciation deduction when you purchase a majority of a
year’s assets during the final months of that year. You’re generally required
to use the mid-quarter convention if more than 40% of the total assets you
buy (with certain exceptions) are purchased within the last three months of
the tax year.
Here’s how it works. Under the mid-quarter convention, assets you acquire
are treated for depreciation purposes as though you bought them in the middle
of a quarter instead of the more usual rule of midyear. The result? A lower
deduction for 2015.
How can you avoid this result? Assets you choose to expense under Section
179 are taken out of the equation and can help keep your total purchases for
purposes of the mid-quarter convention below 40%. In addition, real property
is excluded from the mid-quarter calculation.
Call us for more information about current depreciation rules and how
your year-end planning could be affected.