PEMBROKE, Mass. — The time to do our taxes is once again upon us. Very few of you do your own taxes, but it helps to understand the process.
It helps because there are decisions that you can enact that will affect your bottom line, and thus your tax liability. It helps because often a sizeable check goes out to the government, and it’s good to know why the sum is what it is.
This year, we’re focusing on three expenses: the home office deduction (which I addressed in Part 1), depreciation, and other expenses.
DEPRECIATION
Although every operator will have a Depreciation and Section 179 category, few will know what it is.
In the coin-op business, it’s all the annual use value of all the capital equipment purchased over the years. For example, if a washing machine costs $1,400, and its useful life is 10 years, the annual depreciation expense is $140.
Enter Section 179 Deduction. Section 179 is a provision that, rather than spread the depreciation over the life of the machine, it can be taken off in the year of purchase, up to a total of $25,000 total depreciation expense.
So now you have a choice. Do you take the full amount of the purchase, or do you take the purchase cost over the life of the machine?
The answer seems simple. Take it all at once and increase costs, right? But what if it has been a poor year, then you will be paying minimal taxes anyway.
Wouldn’t it be better if you get more punch from the purchase? So, the decision of how much depreciation depends on current performance versus expected performance in the future.
In fact, if you expect the following year to be a big profit year, you might postpone the purchase until Jan. 1, and take the full Section 179 in that year.
Talk it over with your accountant several months before the New Year. He/she can advise you which direction to go. This is just one area that should be consulted in advance.
PERSONAL EXPENSES
What are personal expenses that count as deductions?
The narrow view is that there are minimal personal expenses. The wide view is that anything that helps you run your business is a legitimate personal expense.
Now, I don’t want afoul of the law, but I would advise you to take a wide view. After all, the IRS is auditing businesses at extremely low rates these days (less than 2%).
Understating income is fraud, but overstating expenses results in it being disallowed and the taxpayer must repay the deduction, plus penalty and interest, which might run 8% or 9%. So, if reasonable, go for it.
Certainly, items such as association membership dues, business books, professional subscriptions, business travel expense and cellphone business usage are legitimate personal expenses.
If you purchase travel gear for business trips, like a suitcase, that is deductible. If you buy anything for your home office, such as a credenza or software, that is deductible.
Your home Internet use (the business portion) is deductible. Taking relevant courses is a legitimate expense. Buying a watch is deductible. If you use credit cards for business, and pay interest, the interest portion is a cost of doing business.
What about more dubious expenses? If you take a couple out to eat with a business motive—hiring the person or winning business from him—that is a deductible expense.
If you hire someone as a coach, that can be seen as a business expense. If you visit Laundromats in other states on a family vacation, you can deduct some mileage. If you have a gym membership, and feel it is vital for your work, that could be considered deductible.
To capture all these personal expenses, don’t rely on memory. Instead, keep an ongoing ledger, and if in doubt before tax time, ask your accountant.
Pay particular attention to these expenses, and you will be rewarded with a lower tax liability.
Missed Part 1 of this story? You can read it now HERE.
Have a question or comment? E-mail our editor Bruce Beggs at [email protected].