Just about everyone knows that large corporations are able to file their taxes in such a way as to reduce, or even eliminate, the amount that they owe each year. While there is certainly widespread disagreement about how the tax codes should be written, there is little doubt that it makes sense for every business to do everything they can (without violating the law) to reduce their tax burden.
What many small business owners fail to realize is that many of the tax reduction strategies used by major corporations can also be used for their company.
One of the most often missed types of tax benefits for small to mid-sized businesses is using the concept of depreciating assets. This is where the costs associated with certain assets can be spread out over the course of multiple years, which helps to reduce the overall taxes that need to be paid.
Of course, the best way to make sure you are properly taking advantage of depreciating assets is to have an experienced business accountant helping you along the way. This article, however, will offer a good introduction to the topic so you can better understand why it likely makes sense for you to take advantage of depreciating your IT assets.
What is Depreciation?
When it comes to taxes and accounting, the concept of depreciation is fairly simple. It is the way to measure the declining value of a particular asset. Most assets will decline in value over the course of a predictable amount of time.
Once you know how long an asset is likely to be valuable to the company, you can spread the costs of purchasing the asset over those years. For example, if you are purchasing all new computers for your office and you expect those computers to be used for three years, you can likely spread that cost over that period of time.
Spreading out the costs on your taxes will help to even out your tax obligations each year and match those expenses up with the period where the revenue is being generated from the asset.
You’ll need some Office and Accounting Software to take advantage of these savings
Ways to Calculate Depreciation
Just to make an already confusing topic even more complicated, the IRS allows your business to choose (in most cases) what type of depreciation calculations you would like to use. There are several options, each of which can be useful in different situations. The following are some of the most commonly used methods of calculating depreciation:
- Straight Line Basis – This option allows you to depreciate any fixed asset over the course of its anticipated lifespan.
- Declining Balance – With this method you will apply a higher depreciation value during the first period of time, and then a declining value going forward so you get most of the tax benefits closer to the time where you made the actual purchase.
- Sum of the Years Digits – In this method you calculate the percentage that is depreciated each year using a simple mathematical formula based on how many years the asset will be used. The salvage value of the item is also factored in.
Of course there are tax benefits for new equipment too. Like a business PC from Helix.
What Types of IT Assets Can be Depreciated?
In general, assets can only be depreciated if they are of significant cost and will be used for a longer period of time. For example, you probably would not depreciate things like office supplies (paper, pens, etc.) since they are inexpensive and used quickly. You can, however, depreciate assets such as computers, phone systems, servers, office furniture, and even buildings.
Some non-physical assets can also be depreciated. The most common example would be an expensive piece of software that is purchased for a company. This would be possible if that software is purchased on its own and has a set expected lifespan. For example, if you were to upgrade all of your PCs to Windows 11 (without having it included on a new PC purchase) you may be able to depreciate that purchase.
Speaking of Operating Systems
Is it Really Worth the Hassle?
There is no doubt that there are some extra steps involved with properly depreciating assets. In addition, if you do not have it done properly, it could cause you some issues with the IRS. While it can seem confusing and time consuming at first, however, taking advantage of depreciating assets really is not as difficult as most people think.
In addition, it will help to encourage you to calculate and track important things like how long assets last, what profit they help generate, and much more. This information can be used in a variety of different ways to improve your business beyond just with lowering your tax burden.
With that in mind, it is almost always worth the effort to take advantage of the tax benefits associated with depreciating your IT and other assets. The best way to get started is to talk to your accountant as soon as possible so they can tell you what information they will need to take full advantage of this process for this year’s taxes and for all years to come.
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