Page 39 - Small Business Taxes

16:29 - 11-Jan-2023
Page 33 of 53
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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
• It must have a useful life that extends substantially be- Listed property. You must follow special rules and re-
yond the year it is placed in service. cordkeeping requirements when depreciating listed prop-
• It must have a determinable useful life, which means erty. Listed property includes any of the following.
that it must be something that wears out, decays, gets • Most passenger automobiles.
used up, becomes obsolete, or loses its value from • Most other property used for transportation.
natural causes. You can never depreciate the cost of
land because land does not wear out, become obso- • Any property of a type generally used for entertain-
lete, or get used up. ment, recreation, or amusement.
• It must not be excepted property. This includes prop- For more information about listed property, see Pub.
erty placed in service and disposed of in the same 946.
year.
Form 4562. Use Form 4562, Depreciation and Amortiza-
Repairs. In general, you do not depreciate the costs of tion, if you are claiming any of the following.
repairs or maintenance if they do not improve your prop- • Depreciation on property placed in service during the
erty. Instead, you deduct these amounts on line 21 of current tax year.
Schedule C. Improvements are amounts paid for better-
ments to your property, restorations of your property, or • A section 179 deduction.
work that adapts your property to a new or different use. • Depreciation on any listed property (regardless of
Election to capitalize repair and maintenance when it was placed in service).
costs that do not improve your property. You can
make an election to treat certain repairs or replacements Employees' Pay
in your trade or business as improvements subject to de-
preciation. This election is available if you treat these
amounts as capital expenditures on your books and re- You can generally deduct on Schedule C the pay you give
your employees for the services they perform for your
cords regularly used in computing your income and ex-
penses. The election to capitalize repair and maintenance business. The pay may be in cash, property, or services.
costs is discussed in chapter 1 of Pub. 535. To be deductible, your employees' pay must be an ordi-
nary and necessary expense and you must pay or incur it
Depreciation method. The method for depreciating in the tax year. In addition, the pay must meet both the fol-
most business and investment property placed in service lowing tests.
after 1986 is called the Modified Accelerated Cost Recov-
ery System (MACRS). MACRS is discussed in detail in • The pay must be reasonable.
Pub. 946. • The pay must be for services performed.

Section 179 deduction. You can elect to deduct a limi- Chapter 2 of Pub. 535 explains and defines these require-
ted amount of the cost of certain depreciable property in ments.
the year you place the property in service. This deduction You cannot deduct your own salary or any personal
is known as the section 179 deduction. The maximum withdrawals you make from your business. As a sole pro-
amount you can elect to deduct during 2022 is generally prietor, you are not an employee of the business.
$1,080,000 (higher limits apply to certain property).
This limit is generally reduced by the amount by which Kinds of pay. Some of the ways you may provide pay to
the cost of the property placed in service during the tax your employees are listed below. For an explanation of
year exceeds $2,700,000. The total amount of deprecia- each of these items, see chapter 2 of Pub. 535.
tion (including the section 179 deduction) you can take for • Awards.
a passenger automobile you use in your business and first
place in service in 2022 is $11,200 ($19,200 if you take • Bonuses.
the special depreciation allowance for qualified passenger • Education expenses.
automobiles placed in service in 2022). Special rules ap-
ply to trucks and vans. For more information, see Pub. • Fringe benefits (discussed later).
946. It explains what property qualifies for the deduction, • Loans or advances you do not expect the employee to
what limits apply to the deduction, and when and how to repay if they are for personal services actually per-
recapture the deduction. formed.
Your section 179 election for the cost of any sport • Property you transfer to an employee as payment for
! utility vehicle (SUV) and certain other vehicles is services.
CAUTION limited to $27,000. For more information, see the
Instructions for Form 4562 or Pub. 946. • Reimbursements for employee business expenses.
• Sick pay.
• Vacation pay.

Chapter 8 Business Expenses Page 33