Depreciation Alternative Can Lead to Big Savings

Julian Block for AccountingWeb writes: Tax-savvy freelancers and other self-employed individuals know that they have two choices on how to write off their outlays for purchases of equipment and other kinds of personal property. One is depreciation; the other is so-called first-year expensing.

But countless tax-challenged entrepreneurs mistakenly believe that depreciation is the only way to deduct equipment purchases. As a result, they pay far more in taxes each year than legally required.

Business owners who go the "standard route" at Form 1040 time recover what they spend on equipment through depreciation deductions over varying periods. Section 167 of the Internal Revenue Code sets out the general rules for depreciation of various kinds of personal and real property. It specifies periods that range from as low as three years to as much as 39 years—with the majority closer to three than to 39.

Section 167 allows businesses to depreciate most of their equipment over five years or seven years. For example, it's five years for computers, copiers, cameras, tape recorders, and the like and seven years for furniture, such as desks, chairs, file cabinets, and safes. Usually, the cap on the amount allowable as a deduction for the first year is only 20 percent of the cost of five-year property and about 14 percent of the cost of seven-year property. [snip].  The article continues @ AccountingWeb.com, click here to continue reading.