Expensing Election Limit
The maximum amount of business equipment that can be expensed
each year is subject to a ceiling amount of $24,000 in 2001 and
2002. This dollar amount is scheduled to increase to $25,000 in
2003 and thereafter.
If the cost of qualified property placed in service by a
business during the year is more than $200,000, the ceiling for
that business is reduced by the amount over $200,000. This limit
is intended to keep the expensing election targeted toward small
In 2001, Bobscarts, Inc., a company that
manufactures electric golf carts, purchases for
$205,000 a machine to be used in its business.
Bobscarts would be able to expense $19,000 of
the cost of the machine ($24,000 - [$205,000 -
Empowerment zone businesses. If substantially all of
the property's use is in a trade or business located in an empowerment
zone, the annual deduction limit is $44,000 for 2001. The
limit increases to $59,000 in 2002. Some special requirements
will apply, so consult your tax advisor or IRS Publication 946, How
To Depreciate Property, if you think this higher limit might
apply to you.
What if your new equipment exceeds the limit? If you
purchase equipment that exceeds the dollar limit, you can
depreciate the excess amount under the usual rules.
Say that you purchased a full suite of office
furniture for $26,000 in 2001, and this was your
only capital expense for the year. You could
expense $24,000 of the cost in 2001, which would
leave a remaining balance of $2,000. You could
then depreciate the $2,000 over seven
years, yielding a 2001 depreciation
deduction of $285.71.
Your total write-off for the furniture in
2001 would be $24,000 + $285.71 = $24,285.71.
If your equipment purchases for the year exceed the expensing
dollar limit, you can decide to split your expensing election
among the new assets any way you choose. Generally speaking,
where you have a choice, it's best to expense those assets with
the longest depreciation
periods (e.g., seven-year property), so you can claim a
quicker write-off for them. If the asset has a shorter
depreciation period (e.g., three-year property), expensing it in
the first year is not going to make as much of a difference.
Special rules for cars. For many small business
owners, the only time they would even approach the $24,000 limit
would be the year they purchase a new car. But as fate would
have it, there is a special rule that prevents you from
deducting the full $24,000. Generally, for cars,
the amount that may be expensed the first year under this
election is limited to $3,060 for vehicles placed in service in
2001 (this amount is adjusted periodically because of