J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line

First-Year Expensing

Instead of depreciating the cost of tangible personal property over a number of years, you may be able to write off the entire cost in the first year. This is first-year expensing or a Section 179 deduction (named after the section in the Internal Revenue Code that governs the deduction). A first-year expense deduction may be claimed whether you pay for the item with cash or credit. If you buy the item on credit, the first-year expense deduction can be used to enhance your cash flow position (you claim an immediate tax deduction but pay for the item over time).

You can elect to deduct up to a set dollar amount of the cost of tangible personal property used in your business. In 2012, you can deduct up to $139,000 (and more in certain economically distressed communities). However, Congress may restore the $500,000 limit that applied in 2011.

For the Future

The limit on first-year expensing drops in 2013 to $25,000, unless Congress makes a change.

The property must be acquired by purchase. If you inherit property, for example, and use it in your business, you cannot claim a first-year expense deduction.

If you acquire property in whole or in part by means of a trade, you cannot claim a first-year expense deduction for the portion of the property acquired by trade.

Example

You buy a new car that is used 100% for business. You pay cash and trade in your old car. You cannot compute the first-year expense deduction for the portion of the new car's basis ...