Writing Off Assets in the First Year

Normally, you can't take a current business deduction for the entire cost of a capital asset in the year you purchase it, because the asset's usefulness to your business will extend beyond the year in which it was purchased. However, there is an important exception to this rule.

A special tax provision allows small businesses the option of claiming a deduction in the first year for the entire cost of such qualifying business assets, up to $24,000 for 2001.


Save Money

If you fully qualify for the expensing deduction, you can get what amounts to a significant, up-front reduction in the out-of-pocket cost of a needed piece of business equipment. For example, for 2001, if you are a sole proprietor in the 27.5 percent tax bracket, the net cost of buying a $24,000 piece of machinery is reduced to $17,400.

If you want to make use of this election, you must do so on your original tax return for the period, on Form 4562, Depreciation and Amortization, or on an amended tax return filed before the due date for your original return (including any extensions). If you don't claim it, you cannot change your mind later by filing an amended tax return after the due date.

Business Tools

Among the Business Tools are Form 1040 and Form 4562. They are in Adobe Acrobat .pdf format, and you will need Acrobat Reader 4.0 to view the files and print them. A free version of Acrobat 4.0 is available in the Business Tools area as well.

What qualifies for the election? To qualify for this expensing election, the property that you purchase must be tangible personal property, that you actively use in your business, for which a depreciation deduction would be allowed. The property must be newly purchased property rather than property you previously owned but recently converted to business use. Also, property you acquired by gift or inheritance does not qualify, nor does property you acquired from related persons such as your spouse, child, parent, or other ancestor or descendent, or another business with common ownership.

Eligible types of property include property that is not a building or a structural component of a building, but is an integral part of manufacturing, production, or extraction, or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services; or a research or storage facility used in connection with any of these processes. It can also be a single-purpose livestock or horticultural structure, or a petroleum products storage facility that is not a building. An air conditioning or heating unit doesn't qualify, nor does intangible property such as a patent, contract right, stock or bond, etc.

The property must be used more than 50 percent for business. If you want to expense property that will be used partly for personal or family reasons (e.g., a home computer that you use for business about 75 percent of the time, and for personal use the other 25 percent of the time), you can expense only the portion of the property's tax basis that corresponds to its percentage of business use.


If, in any year after the year you claimed the expensing election, you either sell the property or stop using it more than 50 percent in your business, you may have to recapture or "give back" part of the tax benefits that you previously claimed. The recaptured amount is equal to the difference between the amount you expensed, and the amount you would have been able to depreciate under the normal rules.

So, if you think you'll only be using the equipment for a year or two, it may be better to forego the expensing election and avoid the recapture problem.

There are a few other details to be aware of, in regard to the expensing election: