Most business owners are aware of Section 179 depreciation rules, but in a move to help stimulate growth, the federal government is also allowing a bonus depreciation on new business property purchases.
The write-off was set up as an additional 30 percent depreciation deduction in the first year for anything with an asset life of not more than 20 years that was acquired on or after Sept. 11, 2001.
“Basically what the rule says, in plain English, is that when you buy equipment … and it has to be new … when you buy that, you get to deduct immediately 30 percent of that cost now and the balance of that you get to depreciate under normal limits,” says Larry Friedman, a CPA with Barnes Wendling.
“The bonus is only temporary for 2001 and 2002,” adds Friedman.
However, bonus deprecation will provide an estimated $97 billion in tax reductions for U.S. businesses over the next three years.
Normally, most small businesses elect to expense equipment, furnishings and other tangible personal property by taking advantage of the Section 179 deduction. In 2003, for instance, a small business can expense the first $25,000 of an investment under $200,000, and 30 percent of the remaining cost before applying the regular depreciation schedule.
But there are a number of caveats. For example, the bonus depreciation must be applied uniformly, Friedman says.
“If you buy 20 computers … you can’t take the bonus on 10 and not the other 10. It’s an all or nothing … you can’t say, ‘We are going to take a bonus on half and the other as normal.'”
And 30 states are not matching their tax rules to the federal standards. According to the Center on Budget and Policy Priorities, a Washington, D.C., research organization, these new federal depreciation rules would cost state governments about $14 billion over the next three years.
“There is a technical term — de-coupling — it’s basically a segregation of the depreciation,” says Friedman.
This de-coupling from the federal tax code means that the bonus depreciation must be taken over six years when filing state returns. It also means you may have to keep two depreciation schedules for business property, one for the federal government, another for the state.
And because the deduction is spread out over six years, the depreciation schedule continues even if the property is disposed of within that six year period.
“Here’s the tricky part … if, in the second or third year, you get rid of the asset, the state of Ohio doesn’t permit you to accelerate the depreciation. You don’t lose it, but you can’t accelerate,” Friedman says. How to reach: Barnes Wendling Inc. (216) 566-9000 or www.barneswendling.com
Tech tax
In February, the Ohio Department of Taxation issued the new value schedule for stand-alone computers.
“Information Release PP2003-01” has the new rates, effective in the 2003 tax year, for any computer used for general business purposes, which include data processing, payroll tracking sales data, maintaining accounting information and tracking orders.
Computers used as part of the manufacturing process, as point-of-sale equipment or directly in the rendition of public utility service are excluded.
Age of computer True percentage of original cost
* One year 75 percent
* Two years 60 percent
* Three 3 years 45 percent
* Four years 30 percent
* Five years 15 percent
