Important Points to Keep in Mind When Depreciating Property

Startup Businesses

Because accelerated depreciation gives you higher deductions in the the earlier years of the asset's recovery period than straight-line depreciation, you will cut your tax bill during those years allowing you to keep more cash in your bank account as you building your business.

However, if you expect losses in the early years, you may not be able to take advantage of the higher deductions. In the case, rather than wasting the extra deduction that accelerated deprecation provides over straight-line depreciation in the earlier years, consider using straight-line deprecation.

Straight-line depreciation will provide higher deductions in the later years which will be worth more as business income rises..

Partial Business Use

When using equipment less than 100% for business you must allocate depreciation to business use. If you're audited, you may be asked to substantiate how you came up with your business-use percentage.

You Must Reduce Basis

Whether you deduct depreciation each year or fail to deduct it, you must still reduce the basis of depreciable property each year by the amount of depreciation you would have been allowed to deduct. This is also true for bonus depreciation.

Regarding bonus depreciation, you are deemed to have claimed if even if you did not and must reduce the basis of the property involved by the amount of bonus depreciation you could have claimed.

If you don't want to claim bonus depreciation you must elect out of it. To do this, you attach a statement to your tax return indicating your desire to opt out of bonus depreciation. You must also provide the property class for which you do not want to claim bonus depreciation. For example, cars and trucks are in the 5-year property class.

Alternative Minimum Tax (AMT)

You may have to file Form 6251 if you use accelerated depreciation rather than straight-line depreciation.

However, there is no depreciation adjustment for the AMT if:

  • You use straight-line depreciation for regular tax purposes, or
  • You use the 150% declining balance method under accelerated MACRS.

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