By Carissa Conley and Bryce Kahler
Every year, business owners across the country try to find ways to lower their taxable income and pay less taxes to the government. The easiest way to reduce tax is through operating expenses, which are necessary to run the business on a day-to-day basis. One of the most important expenses a business owner should take time to understand is depreciation: the expensing of business assets.
Depreciation requires you to spread the cost of an asset over its useful life as it loses value. The easiest method to understand is straight-line depreciation, where the cost of the asset is expensed evenly over its useful life.
If all assets were depreciated using the straight-line method, the business would have the same depreciation expense each year until the assets were fully depreciated. If the asset had a five-year life, it would take five years to get the full benefit of its cost.
But there are a lot of other depreciation methods and tax elections available to the business owner that create opportunities to manage their taxable profit in the year of purchase as well as in future years.
There are current tax laws that offer more favorable options to accelerate depreciation and immediately expense the cost of assets, thus lowering your taxable income for the year. It also enables you to match the expense with the cash outlay or, maybe even better, expense the property faster than you’re repaying the debt and thus put more money in your pocket now (which is why real estate investments are attractive).
