Annual Expensing Election Limit

The maximum amount of business equipment that can be expensed each year is subject to a ceiling amount. The ceiling amount is $24,000 in 2002 and $25,000 in 2003 and later years.

In addition, businesses in the New York City Liberty Zone (basically southern Manhattan) get a special increased first-year deduction of up to $35,000. The increase applies to qualified business property purchased and placed in service in the Liberty Zone after September 10, 2001, and before 2006.

If the cost of qualified property placed in service by a business during the year is more than $200,000, the ceiling for that business is reduced by the amount over $200,000. This limit is intended to keep the expensing election targeted toward small businesses.

Example In 2002, Bobscarts, Inc., a company that manufactures electric golf carts, purchases for $205,000 a machine to be used in its business. Bobscarts would be able to expense $19,000 of the cost of the machine ($24,000 - [$205,000 - $200,000]).

Empowerment zone businesses. If substantially all of the property's use is in a trade or business located in an empowerment zone, the annual deduction limit is $59,000 in 2002. Some special requirements will apply, so consult your tax advisor or IRS Publication 946, How To Depreciate Property, if you think this higher limit might apply to you.

What if your new equipment exceeds the limit? If you purchase equipment that exceeds the dollar limit, you can depreciate the excess amount under the usual rules.

Example Say that you purchased a full suite of office furniture for $26,000 in 2002, and this was your only capital expense for the year. You could expense $24,000 of the cost in 2002, which would leave a remaining balance of $2,000. You could then depreciate the $2,000 over seven years, yielding a 2002 depreciation deduction of $285.71. Your total write-off for the furniture in 2002 would be $24,000 + $285.71 = $24,285.71. However, under a new provision enacted by the Job Creation and Worker Assistance Act of 2002, a depreciation bonus equal to 30 percent of a qualifying item's adjusted basis is deducted first. The deduction bonus applies to qualified property acquired after September, 10, 2001, and before September 11, 2004, and placed in service by the end of 2004. If the furniture was purchased and used at the end of 2001, the write-off would then be as follows: $7,800 (30% of $26,000) + $16,200 (expensing election)= total write-off (with $7,800 of unused expensing election left over)

If your equipment purchases for the year exceed the expensing dollar limit, you can decide to split your expensing election among the new assets any way you choose. Generally speaking, where you have a choice, it's best to expense those assets with the longest depreciation periods (e.g., seven-year property), so you can claim a quicker write-off for them. If the asset has a shorter depreciation period (e.g., three-year property), expensing it in the first year is not going to make as much of a difference.

Special rules for cars. For many small business owners, the only time they would even approach the $24,000 limit would be the year they purchase a new car. But as fate would have it, there is a special rule that prevents you from deducting the full $24,000. Generally, for cars, the amount that may be expensed the first year under this election is limited to $3,060 for vehicles placed in service in 2002 (this amount is adjusted periodically because of inflation).

Thanks to the Job Creation and Worker Assistance Act of 2002, there is a special rule for the special rules for cars that allows an additional $4,600 depreciation deduction to be taken in the first year. The car, however, must be acquired after September, 10, 2001, and before September 11, 2004, and placed in service by the end of 2004. The remaining value of the car that is not expensed or depreciated in the first year is then depreciated as usual in later years.