Dear Tax Talk,

If my small business is buying equipment with a five-year “useful life” and I am paying for it over seven years, are the monthly payments and the annual depreciation both deductible for tax purposes? How do I avoid “double counting” on my profit and loss statement?

— Tom

Dear Tom,

You avoid double counting the equipment on your profit and loss statement by capitalizing the original cost as an asset on your balance sheet or statement of financial position. The liability is also recorded at the same time on your balance sheet.

You then depreciate the asset over its useful life and you deduct the interest on the note payable for the equipment. You will need to complete IRS Form 4562, Depreciation and Amortization.

What is depreciation?

Depreciation is an accounting concept that applies to a business’ fixed assets, such as buildings, furniture and equipment. It spreads the cost of the fixed asset over its useful life so that the expense of the asset can be matched to income.

The table below shows how property can be depreciated using a combination of declining balance and straight line depreciation.

General depreciation system

Method: 200% declining balance switching to straight line

Convention: Half-year

If the recovery period is:
Year 3 years

(%)

5 years

(%)

7 years

(%)

10 years

(%)

1 33.33 20 14.29 10
2 44.45 32 24.49 18
3 14.81 19.2 17.49 14.4
4 7.41 11.52 12.49 11.52
5   11.52 8.93 9.22
6   5.76 8.92 7.37
7     8.93 6.55
8     4.46 6.55
9       6.56
10       6.55
11       3.28

Source: Internal Revenue Service

It would be very helpful if you knew the basics of accounting and bookkeeping. However, if you don’t, there are a lot of great business-accounting software programs that guide you through recording the acquisition of assets.

For 2014, the Section 179 deduction may be of benefit to you. It allows businesses to deduct up to $25,000 of the costs of qualifying property in the initial year. You will need to complete the same IRS Form 4562. However, you will start with Part I: Election To Expense Certain Property under Section 179.

Thanks for the great question and all the best to you with your small business.

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