Expensing It All with the Section 179 Deduction

Expensing It All with the Section 179 Deduction

by | May 14, 2021 | Business Tax

Recently, we took a look at depreciation and its income tax-required relative, MACRS depreciation. Typically, assets like computers and vehicles purchased for a business are capitalized and depreciated over a set number of years through specific MACRS requirements for federal income tax purposes. However, Section 179 of the Internal Revenue Code allows a taxpayer to elect to treat the costs of certain business assets and expense them entirely in a single tax year, popularly known as the Section 179 Deduction. This deduction is often useful for businesses who would rather entirely expense assets like furniture and computers, rather than depreciate them over several years. It can help with their books & records, or even help qualify them for additional tax credits or deductions. Startup businesses often can benefit from Section 179 Deductions.

Qualifying Property for Section 179

To qualify as Section 179 property, the business asset must be:

  • Tangible property (furniture, computers, etc.)
  • Purchased for business use
  • Used more than 50% in the business
  • Not acquired from a related party

Additionally, the asset must be used in the tax year to be claimed for the deduction, not the year it was purchased. Let’s look at an example.

Schultz Startup purchased $2,000 worth of computer equipment for its employees at the end of 2019. However, the business does not start operations until January 2020. Schultz Startup cannot claim the Section 179 Deduction for their 2019 income tax return. They will have to wait until the 2020 filing is due in 2021 to claim the deduction.

The Section 179 Deduction can be claimed on Part 1 of Form 4562, the same form used for MACRS Depreciation.

Some Limitations Apply (Of Course)

The maximum deduction for Section 179 property is $1,040,000 (2020), with a phase-out limit of qualified property expenses beginning at $2,590,000 (2020) and ending at $3,630,000 (2020). Going over the phase-out limit means the deduction will decrease, ultimately shrinking down to zero if the total of purchased qualified property hits $3.63M. The limit is also tied to the net income of the business. Basically, you cannot deduct more in the Section 179 deduction that your business made.

Vehicles receive special treatment in Section 179. SUVs and certain other vehicles are allowed a maximum deduction of $25,900 for each qualified vehicle used for the business.

 

Startups and emerging businesses can benefit greatly from claiming the Section 179 Deduction. The ability to entirely expense assets like office equipment can help mitigate income tax in the early years as the business grows. Properly planning and claiming the Section 179 Deduction may require some assistance from seasoned tax help, such as us here at MiklosCPA. We are a California-based tax and accounting firm that helps businesses with Section 179 deductions and other tax and accounting issues that emerging businesses often face as they grow. Want to know how we can help? Let’s take some time to chat. In the meantime, check out our social media pages for some additional “good-to-know” tax tips and tidbits.

Preserving History with the Rehabilitation Tax Credit

Preserving History with the Rehabilitation Tax Credit

by | Dec 24, 2020 | Business Tax

The Rehabilitation Tax Credit is one of the more unique pieces in the tax code. It’s a tax credit that incentivizes owners of qualified old or historic buildings to renovate and restore those properties into working, business-related order. It allows a credit of up to 20% of the taxpayer’s qualifying costs involved in restoring the building.

Qualified Rehabilitated Building?

For an owner to claim the Rehabilitation Tax Credit, the building must be a “qualified rehabilitated building.” To qualify, the building needs to meet these standards set in IRC § 47:

  • The building must be a certified historic structure, such as through the National Register of Historic Places.
  • The building must be substantially rehabilitated, which means the expenditures for restoring the property during a 24 month period are greater than $5,000 OR the adjusted basis of the building.
  • Depreciation must be allowable with respect to the building.
  • The building must have been placed in service (for a business purpose) before the beginning of rehabilitation.

Owners of qualified rehabilitated buildings may be individuals or corporate entities, such as trusts.  A 24 or 60 month substantial rehabilitation test exists for owners.

Rehabilitation Tax Credit

The tax credit is valued up to 20% of the taxpayer’s qualified rehabilitated expenditures (QREs) used to rehabilitate the building. For expenditures to qualify as QREs:

  • Expenditures must be for nonresidential real property, residential real property (only if a certified historic structure), or real property that has a class life of more than 12.5 years.
  • Expenditures incurred in connection with the rehabilitation of a qualified rehabilitated building.
  • Expenses must be capitalized and depreciated using the straight line method.
  • Expenses in connection to the rehabilitation of a building must be certified by the Secretary of Interior as being consistent w/ the historic character of the property where it is located.

Costs used to acquire or expand the property do not qualify as QRE.  Claiming the credit was amended through the Tax Cuts & Jobs Act (TCJA) of 2017 so that it must be claimed “ratably” over a span of 5 years, rather than all in a single year (pre-TCJA).

Just like other general business credits, unused credits may be carried backward or forward (up to 5 years). Use Form 3468 to claim the rehabilitation credit (and of course if you claim more than one business credit, don’t forget to use Form 3800 for the General Business Credit form).

A tax credit for historic buildings is one of many interesting things that business owner can utilize from the tax code. Having a knowledgeable support team, such as us here at MiklosCPA, to point out these unique pieces can potentially help owners effectively run their business or even see future avenues of growth. We are a California-based CPA firm that assists small and emerging clients in assorted industries. Schedule a call with us and learn how we can help your business! Don’t forget to also check out our social media pages for more “good-to-know” tax tidbits and other

Business Assets & an Appreciation for Depreciation

Business Assets & an Appreciation for Depreciation

by | Dec 11, 2020 | Business Tax

Let’s start off with a little joke. “What did the accountant say to his business client who insisted that his company’s return get filed, ASAP? …….I depreciate if you didn’t.”

Corny puns aside, depreciation is an important concept in accounting and tax. In accounting, depreciation is a method that is used to spread out the cost of an asset, like a vehicle, over its useful life expectancy, rather than expensing it all out in one year and throwing your accounting records off. In tax, the depreciation amount is often used as a deduction and may allow you to recover some of the costs on certain property used in a business.

Depreciating Value

Assets like vehicles, furniture, equipment, and buildings may be depreciated. Generally, it should have a useful life beyond a year and have a salvage value after it lasts beyond its useful life. Land cannot be depreciated though since its treatment is handled more uniquely. In accounting, there are different types of depreciation when recording the depreciation of assets, such as straight-line, double declining balance, and units of production. For example:

Jack purchased a $13,000 vehicle for his business with a salvage value of $2000 after 5 years.  He uses the straight-line method of depreciation ($13,000 cost – $2,000 salvage value / 5 year useful life) and calculates a depreciation of $2,200 each year.

Other depreciation methods like double-declining balance allow for more depreciation in its first few years, or “units-of-production” allow for depreciation based on the usage of an asset, such as a factory machine producing items. The method you choose can affect how much depreciation applies each year and matters to your business.

Depreciation & Tax

The amount that you depreciate on your assets is reported for your taxes and operates like a deduction, such as reporting your depreciation on business assets to the IRS on Form 4562. However, calculating your depreciation within the required guidelines becomes a topic in itself, such as the MACRS depreciation system used by the IRS.

 

Depreciation and the methods your business chooses to depreciate its assets are essential things to consider as your business grows. It can affect your own accounting records in the expenses reported and potentially your profit & loss reports. For tax, depreciation may potentially affect how much you ultimately owe to the government. Depreciation gets tricky, and business owners can make the right choices by having the right advisors, like us here at MiklosCPA. We support small and emerging business clients of assorted industries with their tax and accounting needs. Learn how we can help your business & schedule a call with us! Also check out our social media pages for more useful “good-to-know” articles like this one.

Take Some Credit for Your Business – The General Business Credit

Take Some Credit for Your Business – The General Business Credit

by | Nov 20, 2020 | Business Tax

The phrase “tax credit” rings sweetly in the ears of business owners when it is mentioned. There are several types of business tax credits available, so long as your business qualifies for one, or possibly more. What if all those credits could be combined together? The General Business Tax Credit is an overarching term referring to a nonrefundable business tax credit, consisting of a plethora of assorted business credits available to qualified small businesses.

Qualified Small Businesses

In general, the qualifying small business should be a corporation (with no publicly traded stock), a partnership, or sole proprietorship whose average annual gross receipts do not exceed $50M.

Just to name a few of these credits available to qualified businesses:

  • Work Opportunity Credit
  • Rehabilitation Credit
  • Low-Income Housing Credit
  • Small Employer pension plan startup costs
  • Distilled Spirits Credit
  • Alternative Motor Vehicle Credit

If you only plan to claim one business credit, you only need to file the appropriate form for that credit for your business tax return, such as Form 5884 for the Work Opportunity Credit. Otherwise, you may use Form 3800 to claim the several business tax credits that you may qualify for, and attach any additionally needed forms.

Running up the credit limit

Unsurprisingly, the amount you can claim for the general business credit is limited based on your tax liability and Alternative Minimum Tax liability for the year. Excess credit may get carried into the following years though. Each credit may have its own provisions and limitations, such as the research credit.

By utilizing available business tax credits effectively, owners growing their businesses can potentially expand further and faster. Money that would be otherwise spent paying taxes can be turned around into things such as hiring new staff. Having knowledgeable tax guidance can help owners plan for using such business credits effectively, which we at MiklosCPA can do for our business clients. We have helped many small and emerging businesses with their tax and “back office” accounting needs. Give us a ring (or email) and learn more how we can help your business! Also, please follow our social media pages for additional tax tip pieces like this one as well as other useful business knowledge.

The Backbone of A Successful Business – Good Recordkeeping

The Backbone of A Successful Business – Good Recordkeeping

by | Sep 24, 2020 | Business Tax

 

When starting a business, look to how you will keep your records! The foundation of any successful business is a well-maintained set of records. A good set of records allows a business owner to check in on the health of their business and make effective decisions, such as opening new locations, obtaining a loan, or hiring new staff. Accountants and other staff use records to prepare financial statements and prepare tax returns in an efficient manner. Records may also help business owners by acting as supporting documentation when they deal with state and federal tax issues, such as an IRS audit or if they need to request a refund on an overpayment.

How should I keep my records?

With some exceptions, most businesses are able to maintain their records how they wish, such as through a robust electronic accounting system for a large engineering corporation or a simple notepad for a small mom & pop operation selling trinkets online. Regardless of the type of business, you should use a method that accurately reflects your income and expenses. That data is necessary when filing your tax returns!

Records to keep

Documents such as copies of receipts, electronic spreadsheets, purchase agreements, invoices, carbon paper estimates, payroll stubs, and past tax returns are all things a business should maintain as part of their records. Putting these documents in an ordered filing system can help keep you up-to-date on the activities of your business, as well spare your accountant from headaches!

How long should I hold records?

While there is no hard timeframe in how long you should keep your records, a generally accepted rule-of-thumb is that businesses should hold on to records for 7 years. Some banks may demand 3+ years of statements before approving a business loan. IRS audits generally ask for 3 years of records and any refund claims are within a statute of limitations 3 years from the date of the filed return. Some state tax agencies may possibly ask for records going further back in their audits.

 

Good records help a business flourish. However, as the business expands, the recordkeeping, especially the accounting, may get time-consuming and take away from a business owner’s main duty, growing the business! We can assist with that accounting recordkeeping here at MiklosCPA! We are a California-based CPA firm that has assisted many emerging firms with their bookkeeping and tax needs, as well as provide support for business owners as they grow their firms. Learn more about our services by scheduling a chat with us! Also check our social media pages for future “good-to-know” postings like this and other interesting tax tidbits.

Unemployment and Other Income – Yes That’s Taxable

Unemployment and Other Income – Yes That’s Taxable

by | Sep 7, 2020 | Business Tax, Individual Tax

 

Income may come from a lot of sources. Most of it is taxable. Taxpayers often report income on their tax returns from things such as wages, dividends from stocks, and business-related income. However, there are some not-so-commonly known income sources that are taxable, such as income from unemployment. Here’s a list of some “yes-that’s-actually-taxable” income:

  • Unemployment benefits – A hot topic as of late. Many people who suffered a job loss or furlough during this pandemic rely on this financial lifeline. Just as if they had earned a wage, unemployment money is taxable. Submitting a W-4V Form will allow a withholding to be applied to the unemployment income.
  • Gains from the sale of property – The capital gains made from the sale of property like buildings and stocks are taxable. Notably, this also applies to the sale and exchanges of virtual currency like bitcoin. Check out our article on capital gains for more info.
  • Gambling winnings – Lady Luck have a thing for you? Well you’ll be on the hook for the income taxes connected to those sweet, sweet winnings. Winners are issued a Form W-2G to report those winnings above a certain threshold on your income tax return.
  • Bartering – Exchanges of services, such as a plumber doing plumbing work for an accountant in exchange for accounting services, is consider taxable and needs to be reported as income. Generally gets reported on Schedule C.
  • Alimony (paid to you) – Alimony money paid to you in a divorce arrangement is treated as taxable income. Report any alimony money on the Form 1040 Schedule 1 on line 2a.
  • Loan forgiveness – Worked a deal with a bank or collection agency on an outstanding debt to have it forgiven? Well, depending on some circumstances, that forgiven debt balance may be taxable income. Check out our article on cancelled debts for more info.

Generally, it may be easier to consider your sources of income as most likely taxable unless otherwise specifically exempted, such as child-support money or qualified gains made from the sale of your home.

 Figuring taxable income can get complicated. Business owners already have enough on their plate running and expanding their business. Having the right backup can help move your business forward, and we at MiklosCPA can help you. We are a California-based firm that supports emerging businesses with their tax and accounting needs so owners can focus on their business goals and dreams. Learn more how we can help your business by giving us a call. Also follow our social media pages for future “good-to-know” articles like this and other interesting tax tidbits.

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