Taxpayer's Comprehensive Guide to Llcs and S Corps: 2016 Edition by Jason Watson

Author:Jason Watson [Watson CPA Group]
Language: eng
Format: epub
Tags: -
Publisher: BookBaby
Published: 2016-03-30T00:00:00+00:00

Chapter 7

Fringe Benefits

(updated November 7 2015)

Ahh.. the good stuff. Yes, you work hard. Yes, you want to be able to get a little extra from your hard work and your business. Yes, you want this to be tax-advantaged. We get it. One of the common questions we encounter is buying something, such as a car, to save taxes. Let’s talk about some basic concepts first.

Depreciation

There are three basic types of depreciation available to small business owners-

Section 179

Bonus

MACRS (or other suitable schedules)

Section 179 of the tax code allows you to instantly depreciate assets up to $500,000. Each year this limit is reduced to $25,000. And every year Congress approves some sort of package that extends the limit to $500,000.

Not all property qualifies for Section 179 depreciation, namely real estate. And some property is considered Listed Property which has special rules and limits, namely automobiles and computers. To deduct Section 179 depreciation, your business must have net income to absorb it, otherwise whatever is unused is carried forward to later years.

Bonus depreciation on the other hand does not require business income, and currently bonus depreciation is 50% of Section 179 depreciation limits. The one caveat is that not all property qualifies for Bonus depreciation, and the property must be new, not just new to you. Under Section 179, you can buy the crustiest piece of machinery and deduct the whole thing in the first year (again, provided you have the income to absorb it).

There are all kinds of rules and interplay between Section 179 and Bonus depreciation. Please do your homework. Section179.org is a decent place to start.

MACRS is not a depreciation schedule designed for bourbons. Frankly, bourbon shouldn’t be sitting around long enough to depreciate.. or spoil as us accountants would say. At the Watson CPA Group, Maker’s Mark seems to deplete long before it depreciates. All kidding aside, MACRS is Modified Accelerated Cost Recovery System which is the default depreciation schedule for most property. So, if you do not use Section 179 or Bonus depreciation, you will be utilizing MACRS depreciation (generally speaking). You can also elect other suitable schedules too but those choices and justifications get more complicated.

Tax Planning with Depreciation

We are shocked every time a client walks into our office demanding to pay fewer taxes. We smile and tell them that they are the only one. Most people want to pay more taxes so we find it refreshing when someone wants to pay less. Yes, we’re kidding.

Tax planning with depreciation must be carefully considered. Everyone wants the bird in the hand versus the two in the bush. We get it. But let’s run through some scenarios.

Let’s say you buy a piece of equipment for $200,000 and you deduct the whole thing in the first year using Section 179 depreciation. If your marginal tax rate is 15%, you saved yourself $30,000 ($200,000 x 15%). Nice job. In the next year, your business is growing and you find yourself in the 25% marginal tax rate but you don’t have any depreciation left so no savings.

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