Filing Taxes Properly

Typically, when you invest in a capital asset, you deduct the expense on your tax return in small increments over a period of time. However, in some cases, you may be able to use the Section 179 rule to write off the entirety of a capital asset in the year of purchase. Trying to decide which option is right for you? Work through these simple guidelines. 

1. Can you write off the entire assets without applying Section 179?

As a reminder, a capital asset refers to an item that has a long use life. Typically, these assets will serve your business for years. If an asset is not a capital asset, it may be a current expense. Then, you can write it off during the year of purchase without applying Section 179.

To give you a basic example, paper for your printer is a current expense because you're likely to use all of it during the year of purchase. Your printer, however, is a capital asset because you will use it for years. 

2. Does the asset qualify for Section 179 treatment?

Not all capital assets qualify for Section 179. For instance, if you buy real estate, you have to depreciate it over time. You can't apply the Section 179 rules. However, most forms of business equipment including many vehicles are deductible under Section 179. Talk with an accountant to see if your purchase qualifies for Section 179 treatment. 

3. Will the Section 179 election create a loss?

A business loss is when your expenses exceed your revenue. If your business is a sole proprietorship, you can use the loss to reduce other business income and even a certain portion of the income you earn from a traditional employer. Regardless of your business structure, you can roll a loss forward and use it to reduce tax liabilities associated with future profits. 

However, you cannot create a loss with a Section 179 deduction. If electing for Section 179 treatment creates a loss, you will need to write off the asset slowly over time. 

4. Do you anticipate earning more income in future years?

Effective tax planning requires you to look ahead and make projections about your future tax situation. Say you purchased an asset for $10,000, and you're trying to decide if you should deduct it all at once using Section 179 rules or $1,000 every year for 10 years. Think about which option will reduce your taxable business income the most. 

If you have a lot of income this year, you may want to claim the entire $10,000. If you anticipate having more income in the next few years, you may want to spread the deduction over time. Note that the 10 years is just a sample number. Different assets take different amounts of time to depreciate, depending on the IRS's recommendations for that particular asset. 

To find out more, contact a tax planning service near you.