Each year for the past few years the Congress has changed the depreciation rate, usually increasing it to encourage businesses to purchase capital assets like equipment and vehicles.
Here's how depreciation works: You buy business equipment or vehicles, which are a business expense. Since these business assets have a long life, the benefit to your business as a business expense is spread over a specific number of years, depending on the "useful life" of that specific asset. But in recent years laws have been passed to stimulate business spending by increasing the amount of asset purchases business can count as an expense in the first year after purchase. This increase in depreciation is called accelerated depreciation.
Talk to your tax advisor
Depreciation is a complicated subject and each business situation is different. Not all assets may qualify for these forms of accelerated depreciation, and these may be other restrictions on specific types of assets, so be sure to check with your tax advisor before buying a business asset in 2013.
Section 179 depreciation is an accelerated depreciation rate that is described in Section 179 of the Internal Revenue Code. The 2013 maximum for Section 179 depreciation deductions is $500,000, on up to $2 million of property. That means that you can take up to $500,000 of the cost of up to $2 million of qualified assets off your business taxes for 2013, if you have put these assets into use in 2013. If you buy an asset in 2013 and you don't use it this year, you can't use this accelerated depreciation allowance.
Section 179 depreciation can only be taken if you have a business profit; it can't be used to offset a business loss in 2013.
Bonus depreciation is an additional amount of depreciation that can be taken on purchases of new business assets. Currently (2013) a business can take an additional 50% of the cost of original equipment in the year it is first used. Bonus depreciation can be taken on assets with a useful life of 20 years or more, qualified leasehold improvements, and certain computer software. Other more specific types of assets may qualify for bonus depreciation; read more about what the IRS says about special depreciation allowances.
Bonus depreciation cannot be taken on used equipment. But bonus depreciation can be taken for more than taxable income, creating a net loss and can be added to Section 179 deductions.
Calculating Your Depreciation Deduction
If you are wondering how a Section 179 and bonus depreciation might save you on taxes, you can check out this provided by Crest Capital. First, the Section 179 deduction is calculated, up to the maximum. Then, if the asset cost is over the maximum, bonus depreciation is calculated. The calculator shows your total first year deduction and the lowered cost of purchasing the equipment, vehicle, or software. If you are buying multiple assets, enter the total cost of all assets to see the total tax savings.
U.S. states and accelerated depreciation
Some states may opt out of bonus depreciation for state income tax purposes, and some states have laws regarding Section 179 deductions that are different from federal laws. Your total tax situation, both federal and state, should be taken into account when determining depreciation allowances.
Disclaimer:The calculator described above, and all information in this article and on this site are for general information purposes only, and are not intended to be tax advice or to guarantee your eligibility to take these deductions. Every situation is different and tax laws change, so check with your tax advisor before making a decision that could affect your taxes.