When you may deduct a given expense depends in part on whether it is considered a current or capital expense.
Bonus depreciation. In addition to Section 179, there is a special depreciation deduction for new qualified property called bonus depreciation, Bonus depreciation allows taxpayers to depreciate an additional percentage of the adjusted basis of qualified property in the first year the property is placed in service. For 2012 and 2013, the bonus depreciation amount is 50%. This deduction can be taken in addition to Section 179, although there are additional restrictions on its use. Bonus depreciation expired in 2014 so it is no longer available unless Congress acts to restore it.
Repairs and Improvements
Normal repair costs, such as fixing a broken copy machine or a door, are current expenses and so can be deducted in the year incurred. On the other hand, the tax code says that the cost of making improvements to a business asset must be capitalized if the enhancement:
- adds to the asset's value, or
- appreciably lengthens the time you can use it, or
- adapts it to a different use.
Improvements usually refers to real estate -- for example, putting in new electrical wiring, plumbing, and lighting -- but the rule also applies to rebuilding business equipment.
Gunther uses a specialized die-stamping machine in his metal fabrication shop. After 15 years of constant use, the machine is on its last legs. His average yearly maintenance expenses on the machine have been $10,000, which Gunther has properly deducted as a repair expense. Gunther is faced with either thoroughly rehabilitating the machine at a cost of $80,000, or buying a new one for $175,000. He goes for the rebuilding. The $80,000 expense must be capitalized -- that is, it can't be deducted using Section 179 because it is an improvement -- not a normal repair. Under the tax code, metal-fabricating machinery must be deducted over five years.
Author: by Frederick W. Daily (Nolo)