One tax strategy that stays constant each year is the chance to buy business-related equipment by Dec. 31, thereby lowering the income you’ll pay taxes on.
“If you pay with your credit card, you can still take a tax deduction in 2016 even though you don’t pay the credit card until 2017,” says Mike Calahan, manager of tax services for ATBS, the nation’s largest provider of financial services for owner-operators.
For a large purchase, consider discussing the depreciation options with your financial services provider, given that it may be beneficial to spread depreciation over more than one year.
Bonus depreciation may be taken in addition to regular depreciation. Calahan notes that bonus depreciation applies only for new equipment. Section 179 expense is another option when purchasing new or used equipment. The 50% bonus depreciation and Section 179 expense limits were extended a year ago when President Obama signed the Protecting Americans from Tax Hikes act, he says.
Here’s what they’re worth:
Under 50% bonus depreciation, for a five-year asset with a cost basis of $10,000, half ($5,000) is eligible for bonus depreciation. The remaining $5,000 is eligible for 20 percent depreciation in the first year ($1,000), for a total of $6,000 deducted from your taxable income in the first year that asset was placed service.
Under Section 179, a taxpayer may write-off the lesser of $500,000 of new or used equipment placed in service during the tax year, or the taxpayer’s taxable income.
For most ATBS clients, falling in the 15 percent federal tax bracket if adjusted 2016 income is between $18,551 and $75,300, reducing income by $6,000 would save $900 in taxes. The state tax savings would be less, often much less since many states have individual rates below 7 percent.