The biggest advantage for small businesses is a little Internal Revenue Code known as Section 179. Section 179 allows small businesses to deduct up to 108k (Note: This number changes every year.) of assets completely every year.
What this means is that you can deduct up to this amount in business equipment, computers, furniture etc… without having to worry about depreciation or other tax calculations. Of course, section 179 comes with a few requirements that must be met.
Purchases must be used mostly for business
The official rule is that the asset that you are deducting must be used for at 50% or more for business. Let’s say for example that you are trying to write off a computer in its entirety for a given tax year.
You should make sure that you are using this computer more for business more than pleasure and be able to demonstrate this if you ever get audited. For the most part, as long as you don’t abuse this rule, you should be fine.
Asset must be used for a certain period of time
This rule is kind of vague but basically it states that any equipment you are writing off must be used over a period of time that corresponds to how long you would have depreciated its value to 0. For example, office furniture must be depreciated for at least 7 years.
Therefore, if you were to use section 179 for your furniture, you would have to keep this in use for at least 7 years.
Certain Purchases are excluded
Some common things that you can’t use section 179 are listed below. I might be missing some items so you should definitely check for yourself but these are some of the more common exclusions.
- Inventory – Basically you can’t write off stuff that you are planning on selling
- Gifts – Anything that you’ve obtained or inherited as a gift can be deducted
- Real Estate
- Items that you already own or did not purchase for the tax year
Most small businesses will choose to take the Section 179 deduction for most of their assets. There are some cases where you wouldn’t want to however.
For example, if you business profits are low and you’re at the lowest tax bracket already, you might want to defer some of those write offs for when your business is more profitable to keep yourself at a lower tax bracket later. In any case, you should always do the math both ways to see what makes sense for you.
Learn other ways on how to save on your tax return
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