… Or fine-tune your 2003 income with depreciation choices

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in Small Business Tax,Small Business Tax Deduction Strategies

Instead of grabbing your maximum first-year depreciation write-off (as described above), you can choose another route: Mix and match depreciation methods to claim a smaller first-year depreciation write-off and thereby fine-tune your business's 2003 taxable income level.

Why would you want to claim a smaller first-year depreciation deduction? We can think of several possible reasons.

For example, your business may have an expiring net operating loss (NOL) that will go to waste if your 2003 taxable income is too low. Or you expect that your business may fall in a much higher tax bracket in future years. In that case, moving depreciation deductions out of 2003 and into those later years would prove a tax-smart move.

Another possible reason: You may want to keep your 2003 taxable income at a certain level so you can make larger deductible contributions to your qualified retirement plan.

Here are your fine-tuning options:

Strategy 1: For qualifying new assets acquired before May 6, 2003, you can "elect out" of (choose to forgo) the
30 percent bonus depreciation and instead depreciate new assets using the old, standard depreciation rules.

Key point: You must elect out of the bonus depreciation on "class-by-class" basis. That means, for example, you could elect out for new assets in the five-year class (assets that are ordinarily depreciated over five years). Then you can still claim 30 percent bonus depreciation for all other classes or only for selected classes. It's your choice. Attach a statement to your 2003 return that explains your choice.

Strategy 2: For qualifying new assets acquired on or after May 6, 2003, you can: (1) elect out of 50 percent bonus depreciation and instead claim 30 percent bonus depreciation or (2) elect out of bonus depreciation altogether and depreciate that class of assets using regular depreciation rules. It's your call.

Strategy 3: For new or used assets that qualify for the Section 179 deduction, you can choose to forgo that immediate write-off and instead depreciate the cost under the regular depreciation rules. You make that choice when filling out your Form 4562, Depreciation and Amortization.


Strategy 4: For calculating your regular depreciation write-offs, you can elect to use slower depreciation methods. You make those elections class-by-class by attaching a statement to your 2003 return. You then calculate your write-offs on Form 4562 using the alternative methods you've elected. For example, you could elect to depreciate assets in the "seven-year class" (assets normally depreciated over seven years) over 10 years. Assets in other classes remain unaffected.

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