Question:

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

Answer:

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.)