Every $100 worth of deductible expenses trims $25 off your income tax bill and up to $14.13 of self employment tax if you're in the 25 percent bracket.
Buying business property at year-end can prove either an advantage or disadvantage. First, the plus side. The law generally allows you to claim six months' worth of the depreciation in the year you put the property into service, regardless of how late in the year you make the purchase. This is called a "half-year convention". Even if you buy on the last day of the year, you can earn a substantial depreciation write-off.
This half-year convention works against you, of course, if you buy your business property early in the year. Even if you buy in January, for example, you still get only half a year's worth of depreciation for the first year of ownership.
Now, the potential problem. You can trip yourself up if you buy too much business property late in the year. If the cost of assets put into service during the final three months of the year exceeds 40 percent of the total cost of business property put into service during the year, the half-year convention is replaced by a mid-quarter convention. That means depreciation is calculated as though each asset was put into service in the middle of the calendar quarter during which it was first used.
A year-end purchase would earn just six weeks' worth of depreciation, then, instead of six months. However, triggering the mid-quarter convention rule would also boost write-offs for property put in service early in the year: Assets placed in service during the first quarter would earn 10 1/2 months worth of depreciation rather than six months.
Note: Whether the mid-quarter convention applies is determined using the cost of property reduced by any section 179 deduction and special 30 or 50-percent depreciation allowance you claim. You may be able to avoid the mid-quarter convention by using either of these deductions.
Example: You bought a $4,000 machine for your business in January and a $5,000 machine in December. Because the cost of the machine you bought in December is more than 40 percent of the total cost of machinery put into service during the year ($5,000 divided by $9,000 equals 56 percent), the mid-quarter convention applies. But if you have claim a $3,000 section 179 deduction for the December machinery, the half-year convention applies because the applicable percentage is now 33 percent ($2,000 divided by $6,000 equals 33 percent).
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