Raoul The Taxman: Depreciation

by Raoul

Hola, mis amigos en radio y produccione! Last time we talked about depreciation, remember? It is basically the concept of telling the I.R. of S. that the chit you got ain't no good anymore, so you gonna go out and get some new chit; and, since you use it in your business, you're gonna write it all off.

On the average tax return filed by an individual, there are pretty much dos (2) places where we find depreciation. The reason we find it there is because that's where you are supposed to put it! They are 1) as a Schedule A, Miscellaneous Itemized Deduction, or 2) on Schedule C: Profit or Loss from Business or Profession.

Uno: Schedule A - Itemized Deductions. This is the form on which you record your medical expenses, taxes, interest, contributions, and other stuff like that, including your job expenses and depreciation. Now, the problem with this form is that if you are single, all this stuff must exceed $3,000 ($5,000 if you're married); they give you that much. Most of the time, in order to have enough itemized deductions to use this form, you have to have either a mortgage, or cancer with no health insurance. So if this ain't you, you might as well stop wasting your time and dump this form. However, you may still have a shot with numero dos.

Dos: Schedule C - Business Profit or Loss. If you generate some outside produccione income from your services, this is the form you use; and, also where you reflect your depreciation write off--Other business deductions also. Now, I know some of you slick Willies out there scam that outside income and don't report it. You say, "what the hell." Well I say, "What the hell, man! You are missing the boat!" Sometimes it's better to re-port that income, take all your deductions, and maybe even wind up with a "tax loss". Those are two words that, when used together, make my loins tingle and vital juices flow! But that is another column in another magazine. Back to depreciation.

Now, there are 2 basic ways to deduct depreciation: Over a 5 year period or all at once. The 5-year method is called MACRS, mainly to confuse you. There are standard amounts for each year according to I.R.S. tables (which are closely held secrets). For instance, the depreciation expense for years 1 and 2 on a piece of equipment is 20% and 32% respectively. If I make it to 1991, I'll give you the figures for the rest of the years.

The "all at once" method is called section 179, and your guess is as good as mine as to why. This is an election if you so choose to forego the 5-year plan and expense the entire amount (up to $10,000) in the year acquired. But, if your freelance business shows a loss after section 179, you must use the 5-year method; and, if you understand all this crapola, you're in the wrong business, Jack!

Beginning with next month's issue, I'd like to invite those of you with a specific tax or financial question to become one of "Raoul's Junior Tax Buddies" by sending me your question. You can reach me through my post office box in Medellin, Columbia, or in care of RAP. I'll do my best to answer your question, and if your problem is real screwed up, at least you'll be providing some grins to the rest of our readers.

Adios, and watch out for the little worm in the bottom of the bottle.

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