The maximum amount of business equipment that can be expensed each year is subject to a ceiling amount of $24,000 in 2001 and 2002. This dollar amount is scheduled to increase to $25,000 in 2003 and thereafter.

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.

 

In 2001, 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 $44,000 for 2001. The limit increases to $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.

 

Say that you purchased a full suite of office furniture for $26,000 in 2001, and this was your only capital expense for the year. You could expense $24,000 of the cost in 2001, which would leave a remaining balance of $2,000. You could then depreciate the $2,000 over seven years, yielding a 2001 depreciation deduction of $285.71. Your total write-off for the furniture in 2001 would be $24,000 + $285.71 = $24,285.71.

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 2001 (this amount is adjusted periodically because of inflation).