As a business owner, you strive to run a profitable, thriving business. But you’re not in business to support the IRS, so how do you avoid paying more than your fair share? As in life, knowledge and information are your best defense, and your greatest assets for ensuring profits remain available for business expansion, including capital purchases, and increased staff.
By now, you’ve probably closed the books on 2021, and are setting your sights on a strong, profitable 2022. You still have time to take advantage of options to minimize your taxes for 2021, and implement tax efficient strategies for 2022.
Your first line of defense is to hire a knowledgeable accountant like HKMP who can help you navigate the muddy waters of the tax code, avoiding costly mistakes, and taking advantage of strategies to minimize your tax liability.
Make the Most of Depreciable Assets
If you’ve purchased tangible capital assets such as machinery, vehicles, computers, or cell phones, consider taking advantage of Bonus Depreciation and/or the Section 179 deduction. Both allow you to accelerate depreciation on new, or used equipment by deducting up to 100% of the cost in the year of purchase. You can also deduct up to 100% of a capital lease in the first year, although you spread the purchase price over multiple years.
Section 179 does contain certain limitations:
- You must show a profit for the year
- A maximum deduction of $1.05 million in 2021 and $1.08 million in 2022
- Maximum equipment purchases of $2.62 million in 2021 and $2.7 million in 2022
- Smart phones and laptops available for personal use have a 50% limit
- Vehicles available for personal use have an $11,600 depreciation limit in the year purchased
Bonus depreciation gives you a little more leeway, especially since the limit increased from 50- to 100-percent in 2021. Be aware, the limit will begin decreasing in 2023, until it bottoms out at 20% in 2025. Also, if you take Bonus Depreciation on one asset in a class, you must use it for all assets in that class purchased in the same tax year. Here is where a conversation with your accountant is imperative so you take full advantage of the tax benefits.
Key advantages to using the section 179 deduction:
- You can use all or part of an assets cost
- Can be used for different classes of assets
- Does not need to be used for all assets in a class
- Can be used for Leasehold Improvements
Key advantages to using Bonus Depreciation:
- You don’t have to show a profit for the year
- No upper limit on purchases, or bonus depreciation claimed
Above all, you can use both the Section 179 deduction and Bonus depreciation in the same year. Just make sure you’re not applying both to the same asset.
There are other considerations affecting how and where you use Bonus Depreciation and the Section 179 deduction so it’s critical to discuss your options, and best course of action with your tax accountant. Some slippery slopes include:
- Recapture rules
- When you have to opt out of Bonus Depreciation
- Section 179 ceilings on deductions and annual purchases
- Changes in the allowable percentage of Bonus Depreciation after 2022
Now is the time to plan your future capital purchases, to ensure you’re taking full advantage of the tax savings both options offer.
Accelerating Depreciation on Real Estate
If you invest in real estate, you may want to consider cost segregation to help you pay little or no taxes on your investments. Cost Segregation is a tax strategy that allows real estate owners to utilize accelerated depreciation deductions to increase cash flow and reduce both federal and state income taxes on their rental income.
By breaking down, and reclassifying certain interior and exterior components of a building to personal property or land improvements, you can take advantage of accelerated depreciation Instead of depreciating the entire building over 39 years for commercial property, or 27.5 for residential property, you can depreciate the portions you break out over 5, 7, or 15 years.
Let HKMP help you decide how best to apply these strategies to minimize your tax liability for 2021 and beyond. They can provide invaluable insight, so you optimize all available tax saving opportunities. They’ll guide you through the constantly changing landscape of tax law, helping you use those changes to your advantage, and avoid costly mistakes in the future.