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.