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Small Business Deductions: Depreciation

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How to Compute Depreciation

You may use depreciation tables to determine the amount of your annual depreciation deduction.

The depreciation table you use depends on three factors:

Type of property depreciated:
- 3-year property: (e.g., devices used for manufacturing food and beverages, special tools)
- 5-year property: (e.g., cars, copiers, heavy general purpose trucks, (unloaded weight less than 13,000 pounds)
- 7-year property: (e.g., office furniture and fixtures including desks, files, cell phones, fax machines, musical instruments).
- 10-year property: (e.g., vessels, barges, tugs)
- 15-year property: (e.g., includes land improvements such as fences, sidewalks, shrubbery, roads, bridges)
- 20-year property: (farm buildings, municipal sewers)
Convention used:
- Half-year
- Mid-quarter
- Mid-month
Depreciation method: (e.g., accelerated MACRS 200% or 150% or straight-line depreciation)

Once you know which table to use, you merely go to the table and do the following:

Check the recovery year column for the applicable year.
Decide whether to use the accelerated MACRS table (200% or 150% declining balance (DB)) or the straight-line depreciation table.
Once you identify the recovery year, multiply the original basis of the property by the applicable rate listed in the column to the right of the recovery year.
- Note: If business use is less than 100% you must allocate depreciation to business use according the business use percentage for that property.
Continue applying the rates for each year to the original basis of the property (in other words, do not reduce the original basis by the previous year's depreciation deduction).

Bonus Depreciation for 2011

Bonus first-year depreciation of 100% is allowed for vehicles placed in service in 2011 that were purchased new and used over 50% for business. The bonus depreciation ceiling for 2011 is $11,060 for cars (regular annual ceiling of $3,060 plus $8,000 bonus depreciation) and $11,260 for light trucks, vans, and SUVs, weight-rated 6,000 pounds or less (regular annual ceiling of $3,260 plus $8,000 bonus depreciation). These ceilings must be reduced by personal use.

Section 179 (first-year expensing) is taken into account before claiming bonus depreciation. However, since the bonus depreciation rate is 100%, claiming Section 179 is not necessary.

Keep in mind, bonus depreciation only applies to new property while Section 179 applies to both new and used property placed in service.

Section 179 Deduction (first-year expensing deduction)

Deduction limit: For tax year 2011, the maximum Section 179 deduction is $5000,000.

Purchase limit: For tax year 2011, you may purchase up to $2,000,000 in depreciable business property before the Section 179 deduction phaseout begins.

TAX CHANGE ALERT FOR TAX YEAR 2012

Bonus Depreciation Rate To be Reduced in 2012:

The 100% bonus depreciation rate for 2011 provides a great tax break to business owners who purchased new depreciable property during 2011 and placed it into service. However, for 2012, the rate will be reduced to 50%.

Section 179 Deduction (first-year expensing deduction):

Deduction limit: For tax year 2012, the maximum Section 179 deduction is $139,000.

Purchase limit: For tax year 2012, you may purchase up to $560,000 in depreciable business property before the Section 179 deduction phaseout begins.

Depreciation: Computing Depreciation-Example 1: Accelerated MACRS

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