Current vs. Capital Expenses

Immediate Section 179 Deductions

A valuable tax break creating an exception to the long-term write-off rules is found in IRC Section 179. A small business can write off in one year most types of its capital expenditures, up to a grand total of $105,000 in 2005 through 2007. The annual deduction limit is scheduled to go down to $25,000 in 2008. Some assets don't qualify for this deduction: real estate, inventory bought for resale, and property bought from a close relative.

All small businesses should take full advantage of this provision, unless they don't have enough business income to offset the Section 179 deduction. (The Section 179 deduction can't exceed your total taxable earnings.)

Repairs and Improvements

Normal repair costs, such as fixing a broken copy machine or a door, are current expenses and so can be deducted in the year incurred. On the other hand, the tax code says that the cost of making improvements to a business asset must be capitalized if the enhancement does any of the following:

• Adds to the asset's value
• Appreciably lengthens the time you can use it
• Adapts it to a different use

"Improvements" usually refers to real estate—for example, putting in new electrical wiring, plumbing and lighting—but the rule also applies to rebuilding business equipment.

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