With tax time approaching, most small business owners want to legally minimize what they might owe on their taxes.
There are lots of tax strategies that can help with this, but purchasing much-needed new equipment is one of our favorites! If you do this, what is the best method to deduct the equipment?
Many people seek out the Section 179 deduction, but does it apply to you?
At CSI Accounting & Payroll, we’ve worked with small business tax strategy for over 50 years. During that time, lots of small business owners have wanted to know:
- What is expensing fixed assets, or accelerated depreciation?
- How does bonus depreciation affect taking accelerated depreciation?
- Can I take the Section 179 deduction?
Expensing Fixed Assets, or Accelerated Depreciation
Most states recognize the Section 179 deduction. It’s also called expensing fixed assets and accelerated depreciation.
All of these terms refer to the same thing: accelerating the normal depreciation time frame of a fixed asset into one year.
Placed-In-Service Date
You must use this during the year of the placed-in-service date, meaning when the asset is put into use. This is when depreciation starts.
(For example, you pay for a car in December 2023 before it’s completed, so it starts depreciating once you receive it in January 2024. Since you didn’t have it in 2023, you can’t use the Section 179 deduction for 2023.)
Tax Strategy
When you use the Section 179 deduction, you can deduct the full cost of the asset from your taxable income in one year instead of over multiple years, potentially greatly lowering your tax liability.
However, this is only true if it’s used the right way. We show an example in this article of how this deduction can benefit you a lot in one year, but it misses an opportunity to save you more over time.
Applicable Items
While there are some downsides, they’re fairly mild. There is a limit on the dollar amount allowed to be deducted – currently $1.16 million dollars in 2023 – so this usually won’t affect small businesses.
The Section 179 deduction applies to a wide range of items, but it cannot include property that’s affixed to the ground, such as real estate.
Frequently, small businesses utilize the deduction for:
- Company cars or other necessary vehicles
- Large landscaping equipment
- Office supplies, such as desks or computers
Don’t forget about bonus depreciation, or the Section 168(k) deduction! Let’s dive into what this is.
How Bonus Depreciation Affects Accelerated Depreciation
Bonus depreciation, or the Section 168(k) deduction, is another method of depreciation.
It’s different from the Section 179 deduction because it only applies to certain depreciation windows (asset classes with a useful life of 15 years or less). Plus, also unlike the Section 179 deduction, there’s no dollar limit.
Section 168(k) or 179: Which to Choose?
It’s not recognized by all states (such as Minnesota), but for states that do recognize it, this brings up a tax law issue.
When an accountant goes through tax laws, they will see Section 168(k) before Section 179. They may decide to just go with the first one, but they need to decide which option is better for your situation.
This largely depends on factors like profit levels and tax implications.
Section 179 Deduction Eligibility & Process
Since most states recognize this deduction, if you have eligible assets that were obtained this year (or will be obtained this year), you’re basically in the clear to use it!
When it comes to calculating depreciation, the largest variable (besides the chosen method of depreciation) is the cost of the asset purchased. However, the process is more complicated than this.
You may want to consult with a tax accountant who works with you year-round, such as a monthly accountant, to see if you’re maximizing the power of this deduction. Otherwise, the full benefit of it is wasted.
When you work with the monthly accountants at CSI Accounting & Payroll, we handle it all for you. We help you plan for your taxes year-round so you have the best opportunities possible.
Professional planning is needed to maximize deductions and minimize tax liability year-over-year.
Maximize Your Deductions This Year!
Now that you know about Section 179, Section 168(k), and how you can move forward with planning deductions for tax savings, are you ready to check out monthly accounting services?
If so, please consider CSI Accounting & Payroll! To see if we can be a good fit for your business, click the button below for a free consultation:
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