From: utzoo!decvax!duke!harpo!eagle!wb2!houxz!ihnp4!ixn5c!inuxc!pur-ee!uiucdcs!gear Newsgroups: net.taxes Title: Re: Deduction questions... - (nf) Article-I.D.: uiucdcs.1353 Posted: Tue Jan 18 09:30:08 1983 Received: Thu Jan 27 21:46:20 1983 #R:ihuxx:-31400:uiucdcs:13200002:000:1742 uiucdcs!gear Jan 18 08:58:00 1983 I don't know about the first option, but does that matter because the second has the same effect. As for the difference between II and III, it is simply a question of the effective rate of return after noting that if you use II you can tax an investment tax credit on the first filing year. The trade-off depends on your tax bracket, favoring II more strongly in the lower brackets because a tax credit is a deduction against taxes, not income. At a recent seminar by my tax accounting firm, a break-even point was given at about 18% pre-tax return per annum at the 50% tax bracket. (These figures may be way wrong, as I didn't write them down but just noted that the return rate was sufficiently high that option II was almost certainly the best.) In case this confuses you, the picture is roughly the following: Price $5,000, tax bracket 50% Method III--Deduct in year purchased as an "expense" item Net tax reduction: $2,500 Method II--Depreciate over 5 years First year: 10% Investment tax credit (this may be the wrong #) $500 tax savings Years 1 - 5: Depreciate remaining $4,500 at $900/year, saving $450/year. Total Tax reduction: $2,750 Then the question is "What interest rate must one get (before taxes) to do as well by investing $2,500 in year one and sitting around instead of investing $950 in year 1 and $450 in years 2 through 5?" The facts are a little more complicated because you can probably depreciate it more rapidly and/or use a non-straight-line method which takes a larger percentage of depreciation in the early years. If it were me, I would use method II and get a table from the IRS which gives the depreciation schedules for various classes of equipment.