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Year-end ’08 tax strategy: Sidestep depreciation tax trap

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in Small Business Tax,Small Business Tax Deduction Strategies

In the normal course of events, your company can benefit from the “half-year convention” under the Modified Accelerated Cost Recovery System (MACRS) for property placed in service by Dec. 31. The property is treated as being placed in service on July 1, so you benefit from a half-year’s worth of depreciation on this year’s return.

Caution: If the cost of business assets (other than real estate) placed in service in the last quarter of the year—Oct. 1 through Dec. 31—exceeds 40% of the total cost of assets placed in service during the year, the half-year convention doesn’t apply. Instead, deductions must be computed under a “midquarter convention,” which generally results in smaller first-year deductions.

Strategy: Rely on Section 179 to bail you out. If you elect to cover the assets under the Section 179 deduction, they don’t count toward the last-quarter calculation.

The maximum Section 179 deduction for 2008 is $250,000 (up from $125,000 for 2007). But the deduction phases out for purchases costing more than $800,000.

Tip: Alternatively, keep last-quarter purchases below the 40% threshold to avoid any complications.

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