Archive for December 2016

Big bonuses for small businesses with tax depreciation

As the 2016 tax year draws to a close, it’s time to start evaluating your tax liability. Part of the IRS Code was enacted to help small businesses by allowing them to take a depreciation deduction for certain assets (capital expenditures) in one year, rather than depreciating them over a longer period of time.

Taking a deduction on an asset in its first year is called a “Section 179 deduction.” It’s beneficial to a small business owner to take the full deduction for the cost of the item immediately, rather than being required to spread out the deduction over the item’s useful life.

By allowing businesses to deduct the full amount of the purchase price of equipment, Section 179 is a fantastic incentive for businesses to purchase, finance or lease equipment this year.

Ordinary and necessary expenses can be deducted, like pens and pads of paper. The useful life of a pen is a month and a pad of paper is a week or so. Their useful life is short, so they are considered expenses.

A conference table isn’t like a pen in that way, though. The cost of the table is high and the useful life is longer, so it has to be set up and depreciated.

Code Section 179 allows us to write the table off like it’s a pen for one year. Computers or printers also have a relatively high cost and long useful life. That’s the type of item that Section 179 is for.

You can buy these items in December and write them off in the same year. However, there are some restrictions to keep in mind:

  • 2016 deduction limit is $500,000. This deduction is good on new and used equipment, as well as off-the-shelf software. This limit is only good for 2016, and the equipment must be financed or purchased and put into service by end of day, Dec. 31, 2016.
  • 2016 spending cap on equipment purchases is $2,000,000. This is the maximum amount that can be spent on equipment before the Section 179 deduction available to your company begins to be reduced on a dollar-for-dollar basis. This spending cap makes Section 179 a true small business tax incentive.
  • Bonus depreciation is 50% for 2016. Bonus depreciation is generally taken after the Section 179 spending cap is reached. Note: Bonus depreciation is available for new equipment only.

As a general rule, if it’s a larger purchase for long-term use, it probably qualifies for Section 179 depreciation. If you have further questions about Section 179 or other aspects of your taxes, give us a call!

One way to mitigate tax liability this year

One of the most common questions clients ask me is how to control their tax liability for the current year. And business owners, of course, want to know what they need to do heading into the new year.

As a general rule, I never, ever bet on what’s to come. I only bet on what has happened. Some clients will come to me with pie-in-the-sky plans for the future, but nothing concrete. We have to look realistically at what’s to come in the upcoming year and plan appropriately.

Now, if clients know for a fact that they’ll be launching a new product, opening a new location, or have a large purchase order in hand, I’ll bet on that in the future.

If their business is going to stay the way it was in 2016 and there’s no big changes, then I always look backwards and not forwards. I don’t plan for what we can’t predict.

But if you have an expense you know for certain will occur in 2017, there’s a way you may choose to write that off for your 2016 taxes.

This particular way to mitigate tax liability is to write off definite future expenses in the current year. That’s a specific accounting strategy, and it means that the client who chooses to use it is a “cash basis tax payer.” You know that if you pay expenses in the year 2016, you can write them off in 2016. But you can also pay for (and write off) expenses that are going to occur in 2017.

Take rent, for example. If your rent is $1,000 a month, you can write a check to your landlord for $12,000 on December 31, 2016, to cover rent through 2017. You can deduct this expense in your 2016 tax filing.

Anything you pre-pay for tax reasons has to be used up within 12 months. That means that you can’t pay two years’ worth of rent and expect to receive a tax deduction for that second year. You can also pre-pay insurance, utility bills, office supplies, advertising, and other expenses you know you’ll have.

By accelerating expenses that you know you’re going to spend in the following year, you can budget more accurately and help your tax situation that much more. If you have any questions about how we can help you mitigate your tax liability, we’d be happy to talk with you.