Depreciating Assets: The Small Business Guide to Big Tax Breaks

The two words every small business owner hates to hear: tax season. Even in May, tax season feels like it’s always right around the corner. Any tax feels like too much tax.

While taxes are inevitable, and yes even sometimes useful, small business owners need to understand their potential deduction. When you’re pinching every penny there’s no excuse for missing out on tax credits.

Enter depreciation deductions. These little-known write-offs help you account for assets that lose money over time. In the end, you end up reducing your taxable income and thus paying fewer taxes.

Depreciation deductions make tax season less stressful. Let’s take a look at how your small business can get a tax write-off for your depreciating assets.

What are Depreciating Assets?

Depreciating assets are anything your business owns that decreases in value over time. Computers, cars, and buildings are all depreciating assets.

If you’re confused, think cars. New cars become depreciating assets the minute they’re driven off the dealership lot. Your assets all work the same way.

The How-Tos of Tax Write-Offs

Depreciation deductions allow your business to account for the yearly devaluation of your assets. Like any income tax deduction, the deduction is applied to your taxable income and therefore lowers your total tax payment.

You take the deduction by filing Form 4562. The form includes depreciation schedules and what type of assets qualify for which schedule. You’ll also need to determine which type of depreciation method you want to use.

The Straight-line Method

This method involves depreciating an asset an equal amount over its lifetime (the asset schedule). Let’s use a car for example.

The company car costs $30,000. That car has a salvage value (trade-in value) of $20,000. Subtract the salvage value from the initial cost and divide the result by the number of “useful” years.

We’ll say five useful years in this case. So, 30,000 – 20,000 = 10,000 / 5 = $2,000. You could write off $2,000 every year for the next five years.

The Accelerated Method

Most small businesses choose the accelerated method. The IRS’s modified accelerated cost recovery system (MACRS) and accompanying percentage table guide detail the specific deductions. You’ll take larger deductions upfront and smaller deductions as the asset ages.

We’ll use an example for hypothetical’s sake.

Say you bought that same car for $30,000. For year one, divide the 30,000 by the five year period and multiply by 200 percent. So, 30,000 / 5 = 6,000 * 2 = 12,000 * .5 = 6,000. The first year you can deduct $6,000.

For subsequent years you’ll subtract the previous year’s deduction from the original asset value and divide by the original period. So, 30,000 – 6,000 = 24,000 / 5 = $4,800.

The Section 179 Deduction

This deduction happens in the purchase year and allows you to subtract the entire cost of the asset. However, you can only subtract up to $25,000. Regardless of which method you choose, always quantity surveyor.

Your Deductions

Choosing which asset deduction method is best comes down to your specific needs. Some companies might benefit from taking more deductions upfront, while others might see success spreading deductions over time.

You’re the only person who knows what’s best for your deduction schedule. However, the doesn’t mean you should play amateur tax accountant.

Always consult with a professional before making any decisions.

Growing Your Small Business

Deductions on depreciating assets will help your small business succeed, but they’re only part of business success. In today’s Internet-centric world, SEO is more important than ever.

Our SEO experts can help teach you the best ways to grow your business using SEO and text links. Check out some more blog articles for insider tips and tricks.