Taxes are your enemy, but tax deductions are your friends. Taxes are the great bane of most businesses. Unfortunately, business deductions act as a salve to cool the burning and itching of your bank account.
Business taxes can be summarized simply as calculating your total income, bringing down this amount by as many tax deductions that you can and then pay taxes on the rest of the amount.
Most people are not conscious of all the business deductions and miss out on various assertions. To this end, it is important to understand the theme for deductions for businesses. To determine whether an expense is a deduction, you should ask yourself the following:
1.Did it occur as part of my small business?
2. Was it an ordinary expense associated with my business?
3. Was it a necessary expense?
In addition to asking the questions above, business owners should also ask their auditors to take advantage of cost segregation, a tax mechanism that can generate significant savings for federal income tax. Although it is widely under-utilized, cost segregation is not an accounting tool wildly speculative. In fact the American Institute of Certified Public Accountants’ National Journal of Accountancy has published abundant articles in support of cost segregation.
Costs segregation identifies the components which are applicable and determines the value and the amortization schedule correctly. Under normal circumstances, the depreciation is spread over up to 39 years. However, cost segregation applies depreciation to parts of the property in 5 -, 7 - and 15 years increments. This acceleration in amortization period reduces the income subject to federal taxes. This method does not command alternative minimum tax issues.
Historically, depreciation schedules are allocated between the land and long-life assets. Full-length property is depreciated over 27.5 years for apartments and 39 years for most commercial properties. A study of cost segregation can typically allocate 20% to 40% of the base of the improvement in the short life of the categories, and sometimes more.
High-income owners typically pay a rate of federal income tax of 35% normal and 15% rate on capital gains. The mechanics of reporting the gain on the sale usually assign most of the gain to capital gains which are taxed at 15%.
A cost segregation study does reduce the amount of long-life assets, which is taken up to 25% by allocating more basis for the 5 -, 7 - and 15 year property. If cost segregation is used from the beginning until a gain on the property is recognized, it can reduce the federal tax rate from 35% to 15% for most investors. The exceptions are C corporations that pay the same tax rate for either ordinary income or capital gains.
Don’t pay more than your fair share of taxes. Take all legal deductions.
Minimizing taxes includes regularly appealing property taxes and considering options for income tax reduction. In some cases, tax planning needs to occur years in advance. For estate tax planning, it may be prudent to start decades in advance. Some tax reduction options can be performed after the fiscal year has ended, including a fixed asset audit, cost segregation study and abandonment study.
O’Connor & Associates is a national provider of commercial real estate consulting services including cost segregation, due diligence, renovation upgrading cost analyses, federal tax reduction, tax return review and apartment inspections.