Bonus Depreciation for Sole Proprietors


In the case of a sole proprietorship, can the first-year 50% bonus depreciation still be taken if it puts the business into a net loss situation? Also, can the loss then be used to offset and reduce tax liability on other income? The Section 179 deduction typically seems to preclude this. -Name Withheld


Yes, even sole proprietors can take advantage of the 50% first-year bonus depreciation income tax deduction for qualifying purchases such as buildings, vehicles, furniture, and equipment, says Julie Welch, a financial planner and accountant in Kansas City, Mo. To qualify, items must be new and placed in service by Dec. 31, 2009. Unlike the Section 179 depreciation deduction, which limits a taxpayer’s annual deduction to that year’s aggregate net business taxable income, the bonus depreciation provision can put a business in a net loss situation. The loss can then be used to offset other income as long as a sole proprietor materially participates in the business, she says.

You can even use an individual net operating loss to reduce a prior year’s taxable income, says Welch. To determine your net operating loss, use Form 1045. (For our story on the stimulus plan’s tax perks, click here.) provides news, information, and tools for business professionals and growing businesses. All content provided by SmartMoney is © 2009 SmartMoney®, a Dow Jones & Company, Inc. and Hearst SM Partnership.

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