Equipment Depreciation

$175,000 in Equipment was purchased on credit ($100 was due on delivery and was paid in cash).

Taxable income includes a deduction for $40,000 of depreciation that exceeds the depreciation allowed for E&P purposes.

1. The inventory at your company consists of computer software that the company has developed and is selling. You capitalized (rather than expensed) the cost of duplicating the software, the instruction manuals, and training material that are sold with the software.

Prior to the issuance of §280A in 1976, taxpayers were permitted to deduct reasonable expenses related to the use of a home office under §162(a) as long as the test of being appropriate and helpful was satisfied. The new rule imposed exceptions to the original requirements which resulted in the deduction under many circumstances to be disallowed. One of the exceptions covered under §280A(c)(1)(a) requires that the space is the principal place of business.

The equipment can be depreciated by one of two methods: Section 179 allows for a full write off in the year of acquisition (subject to certain limits). MACRS depreciation allows a systematic write off of equipment based on the type of asset. More business assets are either 5 year or 7 year property (CompleteTax, 2012).

better to take a full advantage of reporting the income and report the business expenses as

With regards to expenses, ensure that your perform a in depth review of expenses incurred over the two years and if they are both necessary and ordinary then they can be deducted for your annual income.

A taxpayer bears the burden of proving his entitlement to a business expense deduction. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933); Burrus v. Commissioner, T.C. Memo. 2003-285. Section 7491(a) provides that the burden of proof shifts to respondent under certain specified conditions. Section 162 provides that a taxpayer who is carrying on a trade or business may deduct ordinary and necessary expenses incurred in connection with the operation of the business. Section 212 provides a deduction for expenses paid or incurred in connection with an activity engaged in for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income. For the expenses to be deductible under IRC § 162 or 212, the taxpayer must engage in or carry on an activity to which the expenses relate with an actual and honest

If an item meets one of those requirements, the company can deduct the cost of the item during the year in which the item is first used or consumed. If not, the company generally needs to “capitalize the amounts paid to acquire or produce tangible property” under Reg. §1.263(a)-1. However, there is also an exception called de minimis safe harbor election under the Reg. §1.263(a)-1(f). In order to utilize this election, a company must have written accounting procedures in place before January 1, 2014, The written accounting procedures must clarify that for non-tax purposes the company expenses items with the amount paid to a property costing less than a specific amount of money or a property with economic useful life of 12 months or less. The election provides business with the option to expense/deduct annually up to $5,000 per item/invoice if the company has an applicable financial statement (AFS), or up to $500 per item/invoice if the company does not have an AFS. An AFS is defined in

IRC Sec. 213(a) states that “there shall be allowed as a deduction the expenses paid

Because if the supplier does not have an ABN and annual sale is more than is $75,000; you are required to deduct withholding tax at 46.5% of

Domestic Production Activities Deduction (DPAD): This is special deduction which is available for the business farms that is engaged in manufacturing or production activities within the United States. In order to be qualified for the deduction, the business must involve in domestic production activities which are manufacturing of tangible personal property, production of sound recording and certain films, software development, production of energy, natural gas, or water; selling, leasing or licensing items manufactured, construction, print media and engineering services. The activities which are not qualified for DPAD includes constructions that are cosmetic in nature, e.g., painting, decorating etc., leasing or licensing items which is related to a party and selling foods or beverages prepared at a retail party ( ). The domestic production activities rate is 9% which reduces the corporate income tax by 3 points. Individuals can claim DPAD on Form 1040, line 35 and C Corporations on Form 1120, line 25. The deduction is figured out by individual and corporation using the Form 8903. The DPAD is a unique opportunity provided

As opposed to purchasing new equipment, we could opt to maintain the equipment we currently have, which has an estimated service life of 11 years remaining. We could retain all of our claimed Investment Tax Credit for this purchase, which has two years of depreciation left, and would not be required to invest in any new training for our employees. We would recognize $31,000 in depreciation in present value terms, as well as save an estimated $200,000 in training costs and losses due to lower production during the “learning curve”. I estimate these savings to be approximately one month of payroll to include both the time spent on training, and our reduced production as employees learn how to use the new equipment. Additional detail of this option is provided in Appendix B, C, & D.

According to the ITAA97, assessable income is defined as income that can be taxed, provided the taxpayer earns enough to exceed their tax-free threshold1. Allowable deductions are defined as any amounts that reduce the taxpayer’s taxable income. Only expenses incurred in the running of a business can be claimed as allowable deductions. In addition, it is not permissible to claim for the ‘Goods and Services Tax’ (GST) component

In this scenario, the labor cost is to print his shop in order to save some costs, and it incurred by him in the course of carrying on his business, which is consistent with the section DA 1(b) ITA 2007 (DA 1(b) General Permission, 2004). Therefore, the labor cost $1,000 is allowed to deduct.