Most ordinary taxpayers are not familiar with using depreciation to save income tax dollars. But if you qualify, it can save you hundreds or even thousands of dollars on your tax return each year. If you ever work from home, run a small or side business or even handle your own investments online, you may qualify for some form of a depreciation deduction.
Even if you are a business person that has been using depreciation for years, you may think that your CPA or tax adviser is handling this matter for you, but the following factors could change the method of depreciation that works best for you. You need to let your tax preparer know the answers to these before a proper determination can be made as to which method is best for your current and future years.
Factors to Consider:
Two Main Depreciation Types: Depreciation deductions for most people come in two forms. Here is a brief description of them so you can make a valid comparison.
1. Section 179 Depreciation: With this method, you take the entire deduction upfront in the year that the expense is incurred. If you use the item over 50% for business purposes, you can take your entire applicable deduction all at once. The current maximum amount for section 179 depreciation is $500,000 annually which makes it appealing to larger businesses as well.
2, Multi-Year Depreciation: There are several methods of multi-year depreciation, but the main focus is that you take a smaller amount upfront and then deduct a similar amount each year for 3, 5, 7 or more years into the future depending on the type of property you are depreciating.
Possible Uses: Many companies have begun encouraging their employees to telecommute or work from home. This can be a great opportunity for the employee and it may create some additional deductions for the home worker. If you establish one room in your home that is exclusively used as your office, furnish it with a desk, files and a computer, these items may be able to be taken as a depreciation expense on your taxes. The same holds true if you run a small business, side business or handle your own investments exclusively online from a home office.
Business Use Percentage: One of the key tests that the IRS looks at is your business use as a percentage of the total use of the items that you are looking to depreciate. If you are using an item over 50% for business and it qualifies for Section 179, you could take the entire amount off your taxes in year one. If it is under 50% usage or not a qualified item, you will be forced to use multi-year depreciation.
Timing Issues: When looking at whether to take the deduction all upfront or over a period of years, you have to look at your expectations for future revenue, deductions and additional depreciation. If you believe your depreciation is a one time event and your income is going to increase each year, it may make sense to take the depreciation over a period of years instead of all upfront. But if your income is high and you expect more deductions and depreciation in the future, take it all now and save as much as possible.
Time Value Of Money: As with any financial decision, the time value of money can have a significant impact on your decision. Saving a tax dollar today instead of spreading it over several years can have an impact on the amount saved. If you are dealing with larger dollars amounts, you definitely have to add a time value calculation to your decision. If the amounts are small, the impact is less vital.
Summary: There are many more details about the use of section 179 depreciation which can be found on the IRS website, including which types of property qualify. The purpose of this article is to help the average taxpayer realize that you too may be able to take advantage of some of the same tax benefits big corporations use. If you are unsure if you qualify, ask your tax adviser and show them this article. Every dollar saved helps you one step closer to your other goals.
To discover additional financial and income tax strategies, check out my blog or download your FREE Wealth Expansion Kit by clicking here. The first step to creating wealth is knowing where you are and then charting a path that will enhance your financial strengths and correct your weaknesses.
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