Sidestep this last-quarter tax trap

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in Small Business Tax,Small Business Tax Deduction Strategies

With October just a few weeks away, watch out for a tax trap that could reduce depreciation deductions claimed by a small business.

Here’s the story: Normally, you can claim depreciation deductions for business assets under the “midyear convention.” This gives you a deduction for a half year’s worth of depreciation no matter when the asset is actually placed in service. For instance, if you get a new machine running on Dec. 31, it’s still treated as if it had been placed in service on July 1.

But there’s a catch: If the cost of assets placed in service during the last quarter of the year (not counting real estate) exceeds 40 percent of the total cost of assets placed in service for the year, the midyear convention doesn’t apply. Deductions must be figured under the mid-quarter convention, which is generally less favorable.

Of course, you may be able to use the Section 179 election to override the mid-quarter convention. The maximum 179 deduction for 2006 is $108,000. But the deduction is limited to the amount of your taxable income, which could be less.

Tip: Play it safe by placing assets in service before Oct. 1. That way, the worst that happens is you get a half-year’s deduction.

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