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NEW LAW TIP - BUY IT NEW

September 25, 2003

The 2003 Tax Act allows taxpayers to deduct up to 50% of the cost of most fixed assets that would otherwise be capitalized and depreciated. The remaining 50% is depreciated under the normal rules.

This special deduction - "bonus" depreciation - expires after 2004. Bonus depreciation only applies to "first use," or new, property. If you are counting on the 50% deduction, make sure that you are buying "new" assets.

Example: A taxpayer must choose between a $1,000,000 "new" machine and a $750,000 "used" machine. The machines have a five-year tax life.

The "new" machine generates $600,000 of deductions in the first year: a $500,000 "bonus" depreciation deduction and a $100,000 regular depreciation deduction (1/5 of it's remaining cost). The "used" machine generates $150,000 deduction in the first year (1/5 of $750,000).

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