This rule had expired as of the end of 2013, but is now back.
This revived rule applies to the following items:
Computer, office equipment, fence, furniture, appliances, patio, car/truck, and playground equipment. It does not apply to home improvements or a home.
The law allows you to deduct 50% of the business portion of these items in 2014, and depreciate the remaining 50% using the normal rules of depreciation.
To be eligible for this rule, the item you purchase must be new. Computers, cars, and televisions must be used at least 50% of the time in your business for them to be eligible for this rule.
Here's an example of how the 50% rule works. Let's say you buy a fence in 2014 for $1,000 and your Time-Space Percentage was 40%. Your business portion would be $400. Normally you would depreciate the $400 over 15 years (as a land improvement). But the 50% depreciation rule allows you to deduct 50% of the amount, or $200 ($400 x 50%). You would depreciate the other $200 over 15 years. Your 2014 deduction on the second $200 would be $10 ($200 x 5% = $10 first year of fifteen year depreciation) for a total deduction of $210.
Without this new rule, you would have to depreciate the full $400 over 15 years: $400 x 5% = $20 deduction for 2014.
Should you purchase items before the end of the year to take advantage of this rule?
If you were planning to buy any of these eligible items in the near future, you will get a bigger tax break if you buy them in 2014. This is because the rule has not been extended to 2015.
Although this is a nice tax break, do not use this rule as an excuse to buy stuff for your business that you don't need! Never buy something just to get a tax break. Your taxes will never go down the same amount as the cost of the item.
In other words, in the above example, even if your fence was used 100% for your business you will still get a tax deduction of only $525 ($1,000 x 100% business use = $1,000 x 50% = $500 + $25). If you were in a very high tax bracket, your taxes would only go down by about $250.
I've written more about this in my article, "It's Deductible! Why Shouldn't I Buy it?"
State Income Taxes
Some states do not follow this 50% rule and deny child care providers this deduction on their state tax return. They may require you to report as income on your state tax return some of the amount you deducted using this rule. Check with your state department of revenue or your tax professional.
The 50% bonus depreciation rule has come, gone and come back again. To keep on top of these tax changes, keep following my blog.
Tom Copeland - www.tomcopelandblog.com
Image credit: www.treehugger.com