The Value of Depreciating Business Assets

A lot of times when we ask new clients if they know what depreciation is they respond, “Yes it is when your car looses value.”  While this is one type of depreciation, it is not what depreciation means from a tax stand point.  Depreciation in relation to taxes is when a company buys an asset, like a computer, vehicle, building, or equipment, and instead of taking the entire expense in the year of purchase, the asset expense is taken over several years.

For example, if you purchased a computer for two thousand dollars, you don’t deduct the $2,000 right away.  You would take a portion of that deduction every year for five years.  Thus, the computer is depreciated over five years.

Example of depreciable assets. Photo Provided by Yellow Snow Photography

Depreciation is helpful because most businesses have less income and more expenses the first couple of years.  Since a business purchases the bulk of its equipment at the start of the business, depreciation allows you to extend the deductions to years when the business has more income and needs to take more deductions.

The type of asset you are purchasing determines how many years it is depreciated.  In addition, there is extra depreciation that you may be able to take the first year you purchase an asset. For example, some types of vehicles can be depreciated almost entirely in the first year, and depending on your net income, other equipment can be deducted a hundred percent in the first year.

Depreciating your assets can be a little tricky.  There are many rules and many ways to strategize using those rules.  It is important to educate yourself on tax topics like depreciation and consult with a tax professional to make sure you are doing things correctly.  If you haven’t already, check out our CD set designed to help you save on your taxes, while avoiding being audited.

Article written by Matthew Anderson of Soulence Tax and Accounting

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Now that Your Taxes are Filed it’s Time to Avoid Being Audited

Well, another tax season has come and gone.  When it comes to taxes, there are two things to worry about, filing on time and audits. Since a majority of people have filed their taxes by now, we thought it would be beneficial to talk a little about IRS audits this week.  Here is a look at some facts you should be aware of when it comes to being audited by the IRS.

Photo provided by joebeone via flicker.com

The first thing you need to be aware of is that the IRS is being way more aggressive with audits than it has in a long time.  We have all seen the recent financial drama caused by Government spending, which has dramatically increased in the last 10 years.  For example, from 2002 to 2008 the national deficit increased 3.5 Trillion Dollars. And from 2009 to the present the national deficit has increased almost 2.5 Trillion Dollars more.  How does the government plan to pay for the increase in debt? Well, the main source of funding for the government is through taxes.  This means that the IRS is increasing, and will continue to increase, its efforts to collect taxes to help fight this dramatically increasing debt.  The IRS will do this through auditing individuals and small businesses.

In addition to standard IRS audits, there is an increase in IRS letters going out questioning various tax deductions claimed on tax returns.  Many people don’t know how to deal with these letters from the IRS, so they just pay the bill and end up paying anywhere from a few hundred to a few thousand dollars in unnecessary tax.

Another way we can tell that audits are increasing is the amount of auditors being hired by the IRS. For example, a few years ago there were only two auditors in the entire state of Utah.  Now there are over twenty.  And in addition to more auditors, we have also noticed an increase in auditors making in person contact with individuals they suspect of owing tax by going to their homes and places of business.   It has been years since we have seen actual IRS auditors going to someone’s house or job.  But in the last six months, we know of three people have an auditor show up in person to their home or work.

We are not giving you this information to scare you but to motivate you.  We simply want you to know that you should be prepared, and there are several things you can do to be prepared.  One great resource can be found at avoidbeingaudited.com.  They have some great tools to help you avoid being audited and to help you in case you are audited. Check them out here.

Deducting Vehicle Expenses: Taking a Closer Look

This week we are finding ourselves in the heat of tax season.  The April 18th deadline is just around the corner, and it’s time to start thinking about getting your taxes done if you haven’t already.  As you are preparing your taxes you might want to look at some of the deductions you are taking and think about some of the deductions that you should be.  This week we are going to spotlight one deduction that is often overlooked for business owners, Vehicle Expense.

Photo provided by PeterJot via Flickr.com

No matter what kind of business you have, you use a vehicle at some point.  Whether it is going to job sites or picking up paper clips, traveling to a convention or going to the bank, ninety-nine percent of business owners use a vehicle.  In fact, vehicle expense is often one of the bigger tax deductions after cost of goods sold and payroll.  Yet it is also one of the expenses in a business that is often not carefully kept track of.  I can’t tell you how many times in a year that our staff asks a client how many miles they drove for business purposes and they reply something like, “Oh I probably put 20,000 miles on my car.”  This is obviously a guess, and as accountants this, is a huge red flag for us and it can be a red flag for the IRS.

The other side of vehicle expense can be just as damaging, which is when the business owner says, “Oh I don’t really use my vehicle for business.” When we sit down with this client, we start talking about what they do in their business, how they get their supplies, how they market their product or services, etc.  More often than not, it turns out they indeed used their vehicle for business all the time, which means they are missing out on a valuable tax deduction.

A common question we get asked is, “Can my business own a vehicle?”  The answer is yes.  However, there are rules about that as well.  If you use your company vehicle more for personal than business, it can cause taxable consequences with additional taxes due, interest, and penalties on your personal tax return.

Because vehicle expense is so often not carefully tracked, it can be an issue in an IRS audit.  There are two common ways to deduct vehicle expense: actual expenses of a vehicle and mileage.  It is very important to keep accurate records.  The IRS has strict rules about both of these methods.  They are not difficult rules to follow once you decide which method you choose.  Also, it is important to know that once you choose a method for a vehicle you must not change the method.

Vehicle expense can save you thousands of dollars in taxes when recorded properly.  For more information about vehicle expense methods and how to properly deduct the expenses to avoid an IRS audit and to learn more about other tax deductions you may qualify for, visit avoidbeingaudited.com