One of the major ways to capitalize on small business tax deductions is by coordinating the purchase and sale of equipment and furniture. Maximizing the tax deductions associated with equipment and furniture requires proper foresight, but promises significant financial rewards.
In general, small business owners should seek to purchase office equipment and furniture towards the end of the fiscal year and sell old assets after the current fiscal year has ended. By purchasing new equipment before the year ends, a portion of the purchase price can be immediately claimed as a write off. Alternatively, you can begin to write off the cost slowly over several years. Any old or outdated equipment that was not yet completely written off will still provide your business with a deductible depreciation expense. Therefore, it is wise to hold off selling it until the year comes to an end.
Immediate Write Off Versus Depreciation
In section 179 of the tax code, it states that a small business has the option to entirely write off most of its new equipment and furniture in the year that it is put into service rather than depreciating it over a few years. This is an attractive option for many small businesses seeking to quickly increase their cash flow.
A business is not required to pay the whole cost of the equipment to claim this deduction. This means that equipment and furniture that was purchased on credit, yet put into use before the end of the year is still eligible for the deduction.
There is a limit, however, to how much equipment you can purchase and claim. Check with your tax consultant to get the current figures for your small business. Moreover, in order for a small business to get the deduction, it has to be profitable. Small businesses without profits can not deduct the first year depreciation deduction, although they have the option to carry it forward to later profitable years.
A new small business, therefore, could opt for the depreciation method that is spread out over a few years. That way, most of the deductions will be available when the business has income and is in a higher tax bracket.
It should be noted, that if you have a C-corporation, an LLC, an S-corporation or a partnership, you may be able to utilize a Section-179 deduction in both your business’ taxes and your personal income taxes. Many states also allow smaller deductions, so be sure to consult with your tax consultant.