Reducing Your Tax Burden Through Depreciation Deductions

By March 10, 2020Credit, Innovation, Tax

If you own your own small to medium-sized business, you shoulder a larger tax obligation than if you were employed by a corporation. Paying for programs like Medicare and Social Security comes directly from your bottom line. You don’t necessarily have the benefit of payroll taxes to fulfill your taxation responsibilities.

There are, however, many ways to lower your taxable income and decrease the amount of your company’s overall tax burden. One of the best ways to accomplish this is through applicable tax deductions. One such deduction that businesses often forget to take advantage of is the depreciation deduction.

What is Depreciation?

Depreciation is the process of a fixed asset losing value over time. A fixed asset is an item that a business purchases with the Intention of earning further income through its use. To be fixed, the asset must be something that the company does not intend to sell for at least a year. It is an investment in their business infrastructure. 

Examples of fixed assets include:  

  • Machinery
  • Computers and software
  • Office furniture and equipment
  • Buildings
  • Vehicles

Depreciation gives businesses a financial method to account for the real-world wear and tear on the tangible items used in their everyday business operations. For instance, cars, construction equipment, delivery trucks, and other business-related vehicles break down over time, requiring repair or replacement. Computers and software become obsolete. Asset depreciation provides accountants with a financial mechanism to spread out an item’s loss in value over its useful life.

Each of these categories has a different depreciation schedule, or time frame, over which their value depreciates. For example, office equipment, computers, and software depreciate over a 5 year time period, as do smaller vehicles such as a company car. Office furniture, like desks and chairs, depreciates along a 7-year scale. Residential property loses value over 27 years while commercial property depreciates along a whopping 39 year period.

How Do You Use Depreciation to Your Advantage?

Businesses are allowed to write-off, or deduct, a portion of their asset’s depreciated value. There are a few different ways that companies can go about a depreciation deduction.   

  • Straight-line depreciation
  • Accelerated depreciation
  • A section 179 expense deduction

The straight-line method is often used by newer companies and start-ups because this method assumes greater profits in the future, once the business is more firmly established. With the straight-line method, your deduction amount steadily increases as the years go by. This is based on the assumption that you will benefit from greater deductions in the future because your company’s earnings have presumably increased.

The accelerated depreciation method is the opposite of the straight-line method. Greater deductions are taken early, with diminishing deductions over subsequent years. This is useful for businesses that experience early success, or have successfully addressed an emerging market trend or consumer need.

The section 179 expense deduction allows a company to write off the entire depreciation of a new asset in the first year of ownership. This is best utilized by established but growing companies who have recently acquired new durable business equipment. The tax offset available through this method can help the business to continue growing and expanding.

Depreciation Consulting with Incentax

Starting a business is costly. It takes time to see a return on your initial investment. The tax burden that falls on a small business owner’s shoulders doesn’t make it any easier to build that business up to a suitable level of prosperity. Fortunately, the tax code has a number of regulations built in to assist startups in getting their feet under them. That’s why it is important to work with tax professionals like Incentax to help you develop the best strategic tax plan possible to ensure the prosperity of your business. Please contact us today to set up a tax incentive consultation.