Home Business Tax Deductions: The Depreciation Question

When it comes to home business tax deductions, you will often hear the word ‘depreciation’. Depreciation in terms of taxes refers to the amount of time you have to deduct certain expenses or items over. Basically, when you purchase something for you business that may last several years or even decades, you cannot claim the entire amount up front. There are often guidelines on how to depreciate certain items. Below is some information that can give you more insight on the process.

Straight Line Depreciation

When filing taxes for your home business, there are several items that may be depreciated. For example, if you purchase a computer at $5,000 and it is considered a 5 year property, you can deduct $1,000 per year for the next 5 years for that computer. Much of the equipment you will be buying will already have a timeline for depreciation set. Computers, cars, office machinery and appliances are typically 5 years whereas furniture for the office tends to be 7 years. The depreciation timetable ranges from 3 year property like tractors, all of the way to 39 year property with non-residential real estate. If you choose to depreciate this way, you will have a set time for whatever item you are deducting and you will divide the cost by the number of years. The downside to this method is that you get less money back up front. You will though end up getting the total amount.

Modified Accelerated Cost Recovery System (MACRS)

MACRS is a quicker way to depreciate your home office items. Through this method you can double the amount deducted the first year and then deduct less for the rest of the time. While you still get money back over time, you will receive more up front.

179 Deduction

Another way to depreciate for your business items is by following the 179 deduction. For this method, you can only make one big deduction during the lifetime of your company. Also, once you depreciate the property the first time, you have to reduce your basis in the property for the exact amount that you depreciated. So if you use the same example for the computer, you could claim it all in the beginning but then have to reduce your basis each year for 5 years by $1,000. This deduction is typically taken when you are starting a business with a high amount of costs.

Choosing the Best Method

None of these options are better across the board. It is best to consider the situation that you are in to determine which is the best option for you and your home business. If you plan on having a lot of start up costs, the 179 deduction may be the safest route to take. If you are unsure of the expenses that you will have later on though and you have already started your business with lower costs, straight line or MACRS may be the best option for you.

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