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Tax Tip
Overview
Depreciating Business Property
You generally must depreciate the cost of property over a recovery period assigned by the IRS. For example:- Equipment generally is depreciated over 5 or 7 years.
- Automobiles are depreciated over 5 years.
- Tractor units for over-the-road use are depreciated over 3 years.
However, the Section 179 Deduction allows you to choose to deduct all or part of the cost of certain qualifying property in the year you place it in service. You can do this instead of recovering the cost by taking depreciation deductions over a specified recovery period.
Deduction Limits
Under Section 179, there are limits on the amount you can deduct in a tax year. You can deduct up to $125,000 of the cost of eligible business property in 2007 (the limit is higher if you placed the property in service in a qualified enterprise zone, qualified renewal community property or GO Zone (certain parts of the area affected by Hurricane Katrina). This deduction is reduced if you purchase more than $500,000 (up to $600,000 in the GO Zone) of eligible property for the year. Real estate and property used mainly in connection with furnishing lodging are not eligible for this deduction.The eligible property must be acquired for business use and acquired by purchase. Eligible property includes the following:
- off-the-shelf software
- machinery and equipment
- property contained in or attached to a building, other than structural components
- gasoline storage tanks and pumps at retail service stations
- livestock
The Section 179 deduction can't exceed your taxable income from businesses (including wages) for the year.
When deciding whether the depreciation deduction or the Section 179 Deduction best suits your needs, consider these factors:
- your current tax bracket compared to your future tax bracket
- your need for current tax savings
- how long you expect to keep the property for which you claim the deduction
For more information, talk to an H&R Block tax professional or see chapter 2 of IRS Publication 946.
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Frequently Asked Questions
Question: I'm self-employed. Can I lease a car for my business/work and claim the expenses?
Answer: Yes, you may deduct your leasing expenses as a business expense, but with limitations. You can deduct only the business percentage of the lease expense. Also, if the value of the car exceeds a specified amount you have to reduce your otherwise deductible lease payments. Instead of deducting the lease payments (and your other auto expenses), you may be able to deduct the standard mileage rate for business use. You can get more information from IRS Publication 463 or call your nearest H&R Block office.
Question: What is the best way to keep track of business expenses so that there will not be any questions later with the IRS?
Answer: Keep receipts and record books. Enter the applicable amounts at or near the time they were paid. Be aware of additional requirements for entertainment expenses and travel. See Publications 463 and 535 for more information. In addition, you can contact a local H&R Block office and request a business recordkeeping book.
Question: I bought a computer and a number of books this year for work. Is there any way I can claim them as deductions?
Answer: If you are self-employed, the cost of the books may be deductible or depreciable depending on their shelf lives. The cost of the computer (hardware) is depreciable although you may want to claim a section 179 deduction to write off the cost this year. If you are an employee and your employer would reimburse the cost, you can't claim the deduction. The computer's cost can be deducted only if you bought it for your employer's convenience.
More Self-employment FAQs
Answer: Yes, you may deduct your leasing expenses as a business expense, but with limitations. You can deduct only the business percentage of the lease expense. Also, if the value of the car exceeds a specified amount you have to reduce your otherwise deductible lease payments. Instead of deducting the lease payments (and your other auto expenses), you may be able to deduct the standard mileage rate for business use. You can get more information from IRS Publication 463 or call your nearest H&R Block office.
Question: What is the best way to keep track of business expenses so that there will not be any questions later with the IRS?
Answer: Keep receipts and record books. Enter the applicable amounts at or near the time they were paid. Be aware of additional requirements for entertainment expenses and travel. See Publications 463 and 535 for more information. In addition, you can contact a local H&R Block office and request a business recordkeeping book.
Question: I bought a computer and a number of books this year for work. Is there any way I can claim them as deductions?
Answer: If you are self-employed, the cost of the books may be deductible or depreciable depending on their shelf lives. The cost of the computer (hardware) is depreciable although you may want to claim a section 179 deduction to write off the cost this year. If you are an employee and your employer would reimburse the cost, you can't claim the deduction. The computer's cost can be deducted only if you bought it for your employer's convenience.
More Self-employment FAQs
Related IRS Forms & Publications
- Schedule A (Form 1040) - Itemized Deductions
- Schedule A (Form 1040) Instructions
- Publication 529 - Miscellaneous Deductions
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