As a business owner, finding a way to get rid of as much tax burden as you can is an important thing to take into consideration when it comes to increasing your profits.
Indeed, while the drive forth to conquer new markets and win over new customers will be the main strategy to attract more people to your brand, and thus earn more money, you can also utilize other strategies to increase your business’s value.
What we're talking about is depreciation – a curious tax reduction strategy that not many people know about. The thing about depreciation is that it may come across as a tad counterintuitive at first, because who would want their property or other assets to suffer a terrible depreciation?
Of course, the very nature of property and asset depreciation is that it’s unstoppable, so it’s going to keep happening, and there’s nothing you can do about it. You can try investing in the property or the asset you have to make its value stick, but that wouldn’t make any sense, because you’d be losing a ton of money on nothing.
In this article, we’re going to talk about depreciation and how you can make good use of it as a business owner. As you will see, using depreciation to reduce your taxes and so increase the overall value of your company is a bit a complicated procedure. Still, if you understand the premise well enough, you can start depreciating your business assets pretty much straight away.
Here’s how it works.
Using Depreciation as a Tax Reduction
When it comes to using depreciation as a tax reduction method, you have to make sure first that the asset you’re doing this on qualifies for depreciation in the first place.
The thing is, not all properties or assets qualify for depreciation, as only business-related assets can be used for this purpose, so to speak. For example, if you are a business owner with a large office you paid some 100,000$ for and you also happen to own a personal house you paid 70,000$ for, you can only apply for tax reduction on the account of property depreciation for the hundred grand you spent on your business premises.
Only if you're using an asset or a property for running your business, or your employees use it to work, you can claim the depreciation on those assets. The idea here is for the government to ease the tax burden for business owners so that they can continue doing well and creating jobs for other people.
What You Can Depreciate
Filling for depreciation tax cuts is a money-saving method that only applies to certain business assets that have a particular "nature of deteriorating" over time, so to speak.
For example, the most common assets that you can get a tax reduction for include buildings, vehicles, computers, various machines that you use in business, office furniture, and some other assets with a value that deteriorates over time.
That said, the depreciation rate for the aforementioned assets varies significantly.
Computers, for example, have a general expected "life" of five years in terms of depreciation. (Although they may last longer, generally business replaces computers fairly often.) So, you can claim your depreciation on a bunch of computers you have as a part of your business within those five years. You can either claim the entire depreciation straight away or wait until later – it's your call. We will discuss this in more detail in the sections below.
Vehicles may have a slower depreciation, but their rates typically depend on what the model is and on a variety of other factors.
As far as buildings are concerned, they usually have the longest depreciation run out of all business assets you may have, and it lasts for 40 years. Over these forty years, the value of this building will steadily keep going down, which means you'll have to pay less and fewer taxes for it as time goes by.
That said, certain assets you have as a business cannot be depreciated, the most notable of which is the land. Land on which your business-related building is the situation is not seen as an asset that can deteriorate over time, so you cannot claim a tax reduction on the land – only on the buildings on it.
Ways of Depreciation
Since the most important parameter to take into account when depreciation is in question would be the lifecycle of the object of depreciation, there are several ways you can claim the tax reduction depending on how much time you have to work with.
Depreciation for business owners can be done in three ways, or rather – in one way, but using three different methods. Here’s how these three differ.
As the name of this method suggests itself, with the straight-line approach you depreciate your property in a straight line – an equal amount of money each year.
Now, the way you come up with this figure is you take the overall value of the property when you bought it, subtract its value at the end of its cycle (when it’s completely depreciated), and then take that number and divide it by the number of years of the lifecycle of that asset.
While this method may not appear to be much for a person looking for some sort of quick tax escape, it does represent an excellent long-term strategy for experienced investors or for anyone patient enough to reap the benefits of paying less and less tax on their assets over an extended period.
If you opt for the accelerated method, you’re choosing to claim a larger tax cut in the first couple of years of your property’s depreciation and then smaller ones later on down the road.
While you will end up paying exactly the same amount of taxes at the end of the day as with the straight-line method, the benefit of the accelerated method is that you will not have as much tax pressure early on – which makes this method an excellent solution for small businesses and startups.
Of course, sometimes it’s better to go with the straight-line approach even though it may appear to be less appetizing, so to speak. If you’re not sure what to do, hiring a professional to make you a comprehensive tax depreciation report may be the best way to approach this.
The more money you have in the first couple of years of running your business, the more you can keep investing, and the more of it you’ll be able to return, too.
The most extreme form of tax depreciation, so to speak, would be the immediate deduction depreciation claim – where you claim the entire tax relief on account of depreciation – in the first year.
This move can be a decent boost for small business owners, but it’s also somewhat risky, so you have to be careful with how you approach this.
All in all, claiming tax depreciation is a great way to reduce your taxes on an annual basis and return as much of the money you invested in the assets as possible. Whether you choose to chip away at your tax returns on a year-to-year basis or prefer to get one huge tax relief for the current year, property depreciation can do wonders for your overall business value.
Mia Ackerson is a Melbourne-based writer. Loves writing about online businesses, digital marketing, and technology. She’s also interested in home decorations, reading books, watching movies, baking, and gardening. You can follow her on Twitter.