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REDUCE
YOUR TAXES BY DEDUCTING THE COST OF BUSINESS EQUIPMENT
Almost all businesses have at
least two things in common. They experience cycles in which their income
rises or falls, and they periodically need to replace worn out or obsolete
equipment with new equipment. Although businesses cannot completely
eliminate the inevitable slow periods in the cycles, through proper
planning they can satisfy their need for new equipment while also reducing
their taxes during years in which their income increases.
Discussions about income taxes
generally revolve around the Internal Revenue Code (the "Code"),
and this case is no exception. Although the Code allows income tax
deductions for the cost of new equipment, it generally requires businesses
to take the deduction over three or more years, depending on the type of
equipment. These deductions are called depreciation deductions.
Section 179 of the Code creates an
exception to the standard depreciation deduction rules. In some instances,
Section 179 allows an income tax deduction for the entire cost of new
equipment in one year rather spreading out the deduction over three or
more years.
During 2002, businesses can deduct
up to $24,000 for the cost of equipment purchased at any time during the
year. (Strangely, Section 179 deductions are not allowed for air
conditioning or heating equipment.) The deduction increases to $25,000 for
2003 and subsequent years. Acquisition costs exceeding these amounts may
be carried forward and taken in later years. However, Section 179 imposes
the following five technical requirements that businesses must satisfy to
take the deduction:
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The equipment must
constitute property as defined by Section 179. Property
under Section 179 includes only items that generally last a while.
Items that ordinarily are quickly consumed are excluded. For example,
a photocopier generally continues working for a while, while in
comparison the toner ordinarily is quickly consumed. The photocopier,
but not the toner, would constitute Section 179 property.
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The property must be acquired
as defined by Section 179. Property is acquired under
Section 179 only if it is purchased from a vendor who is unrelated to
the purchaser. Property purchased from a spouse, parent, child, or a
company owned fifty percent or more by the purchaser is not deemed to
have been ""acquired"" under Section 179 and will
not qualify for the deduction. Property the purchaser receives through
barter, gift, or inheritance is also not deemed to have been
""acquired"" under Section 179.
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The property must be timely
placed in service. Section 179 deductions are available
only if the acquired property is placed in service during the
year of acquisition. Property is deemed to be ""placed in
service"" when it is ready and available for use by the
business. Generally, the property must be operational and at the work
site. The deduction is the same whether property is placed in service
on the first or last day of the year. Property that is paid for but is
not delivered, or property that is even if paid for and delivered but
is not operational, is not ""placed in service""
under Section 179 and therefore does not qualify for the deduction.
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The property must be used
for an active trade or business. Section 179 property must
be used in an active trade or business. An active trade or
business includes any activity that is conducted with the intent to
make a profit. Most businesses clearly meet this test. Doubts sometime
arise when an activity resembles a hobby, such as sailing. Owning a
sailboat is probably not an ""active trade or
business"" unless the owner transports paying passengers or
rents the boat often enough and for a high enough price so that there
is a reasonable chance of making a profit. If, in the year of
acquisition, a purchaser uses property for both business and
non-business uses, the deduction is reduced in proportion with the
non-business use, provided that the business use is at least fifty
percent. The deduction is not available, however, if, during the year
of acquisition, the property is used more than fifty percent for
non-business purposes, even if the property is thereafter shifted
entirely to business use.
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The total annual
acquisition cost for all property must not exceed $200,000.
Section 179 is fully available only if the cost of all property the
business acquires and places in service is less than $200,000 per
year. Because Congress intended that Section 179 should apply
primarily to small businesses, the deduction is reduced
dollar-for-dollar to the extent that the equipment acquisition costs
during any year exceed $200,000. For example, if all the property a
business acquires and places in service during 2002 costs $210,000,
the Section 179 deduction is reduced from $24,000 to $14,000. (The
$24,000 Section 179 deduction is reduced by $10,000, which is the
excess beyond the $200,000 acquisition limit). If the acquisition
costs during 2002 were as $225,000, the Section 179 deduction would be
zero.
Operating a successful business is
no easy task, and making every dollar count is crucial. The Section 179
tax deduction can help ease these financial burdens of business owners who
know how the tax code can work for them.
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