Every asset you purchase for your business acts as an investment. This helps your business grow and improve profitability.
However, many essential assets aren’t cheap, and their value can dramatically drop over time. For a business looking to grow, these costs either need to be lessened, or the business needs tax deductions to help it better manage these expenses. This is what tax depreciation is for. It helps spread out the cost of assets in a reasonable way, allowing a business to grow without significant losses.
You Have to Understand Depreciation
Depreciation plays a big part in spreading the cost of business assets. Yet, many business owners aren’t familiar enough with the term to use it for tax purposes. When you understand depreciation and how it works in terms of taxes, you have a clear path towards minimizing costs of operation.
From the perspective of tax agencies, every single purchase that your business makes needs to fill three criteria in order to qualify for depreciation. The asset must be owned by the business, which disqualifies any rental properties and equipment that you use. The value of the asset has to be above 500$, while also having a life expectancy of over a year. Other tax provisions that affect the asset also disqualify it for depreciation.
Once you’re familiar with this concept, knowing what to submit becomes a much easier task.
Choose the Right Method of Depreciation
Once you’re familiar with the general concept of depreciation, it’s time to choose which method of depreciation to apply for different assets. Before you decide, you have to ask yourself a crucial question: are you in a rush to deduct the cost of the asset for this year?
The answer might seem simple, but it’s far from it. If you’re aiming to absolutely minimize the total cost of assets for this year, claiming Section 179 would be the better choice. It deducts a certain amount of the cost of an asset, but only for the given year. Then again, you might anticipate that the asset will be used by your business for years to come. In this case, choosing to depreciate an asset over time ensures you’ll have better deductions in the future. If you expect your business to last and continue using these assets, this might be the better option.
Get an Independent Estimate of Your Depreciation Rate
Before you choose a depreciation method, you’ll want to get an independent estimate of the depreciation rate for your assets. Calculating this requires that you know the cost of the asset and the tax depreciation rate.
As you’ve bought the asset, you will have thorough records of the costs that are associated with it. The tax depreciation rate is a bit trickier to calculate. It relies on a few variables, such as the useful life of the asset. While these variables are easy to track, doing the calculations takes time and effort that could be better spent running the business. Outsourcing the process allows you to get an accurate tax depreciation report within a short amount of time. This can be very important during tax season when you might have your hands full.
Keep Thorough Records of Tax Documents
Thorough record-keeping helps streamline the tax depreciation process, while also allowing you to make more accurate claims. The records of your assets and depreciation reports can be very useful for future estimates.
The general consensus is that all of these documents should be kept stored away for at least seven years. This helps avoid issues with tax agencies that will want to check these records. Most documents of these types are kept in physical storage, which doesn’t guarantee their safety. Luckily, businesses are moving away from physical storage and turning to digital. If you haven’t already done this, make sure you transfer all of your records to a digital medium, as this will keep your documents safe and easy to manage for as long as you need them.
Depreciation is one of the more effective ways for businesses to spread the costs of their assets. It’s a lot easier to manage these assets when you don’t have to pay as many taxes, which is why applying for depreciation is crucial. Before you file for claims, make sure you fully understand the best course of action during the process, as it could further reduce your expenses for the year.