With a little over one month to go in 2019, small business owners should think about purchases or investments that make good business sense and will give them a break on their taxes.
Owners with available cash and a wish list should consider what equipment they need. Or, do they want to create a retirement plan or make a big contribution to an existing one? If they have home offices, are there repairs or improvements that can be done by Dec. 31? But owners should also remember the advice from tax professionals: Don’t make a decision based on saving on taxes. Any big expenditure should be made because it fits with your ongoing business strategy.
A look at some possible purchases or investments:
NEED A PC OR SUV?
Small businesses can deduct up-front as much as $1,020,000 in equipment, vehicles and many other types of property under what’s known as the Section 179 deduction. Named for part of the federal tax code, it’s aimed at helping small companies expand by accelerating their tax breaks. Larger businesses have to deduct property expenses under depreciation rules.
There is a wide range of property that can be deducted under Section 179 including computers, furniture, machinery, vehicles and building improvements like roofs and heating, air conditioning and ventilation systems. But to be deducted, the equipment has to be operational, or what the IRS calls in service, by Dec. 31. So a PC that’s up and running or an SUV that’s already in use can be deducted, but if that HVAC system has been ordered but not yet delivered or set up, it can’t be deducted.
It’s OK to buy the equipment and use it but not pay for it by year-end — even if a business buys the property on credit, the full purchase price can be deducted.
You can learn more on the IRS website, www.irs.gov. Search for Form 4562, Depreciation and Amortization, and the instructions for the form.
HOME OFFICE REPAIRS
Owners who run their businesses out of their homes and want to do some repairs, painting or redecorating may be able to get a deduction for the work. If the home office or work space itself is getting a makeover, those costs may be completely deductible. If the whole house is getting a new roof or furnace, then part of the costs can be deducted.
To claim the deduction, an owner can use a formula set by the IRS. The owner determines the percentage of a residence that is exclusively and regularly used for business. That percentage is applied to actual expenses on the home including repairs and renovation and costs such as mortgage or rent, taxes, insurance and maintenance. There’s an alternate way to claim the deduction — the owner computes the number of square feet dedicated to the business, up to 300 square feet, and multiplies that number by $5 to arrive at the deductible amount. However, repairs or renovations cannot be included in this calculation.
Owners should remember that the home office deduction can only be taken if the office or work area is exclusively used for the business — setting up a desk in a corner of the family room doesn’t quality. And it must be your principal place of business. More information is available on www.irs.gov; search for Publication 587, Business Use of Your Home.
Owners actually have more than a month to set up or contribute to an employee retirement plans — while some can still be set up by Dec. 31, plans known as Simplified Employee Pensions, or SEPs, can be set up as late as the filing deadline for the owner’s return. If the owner gets a six-month extension of the April 15 filing deadline, a SEP can be set up as late as Oct. 15, 2020, and still qualify as a deduction for the 2019 tax year.
Similarly, contributions to any employee retirement plan can be made as late as Oct. 15, 2020, as long as the owner obtained an extension. This means owners can decide well into next year how much money they want to contribute, and in turn, how big a deduction they can take for the contribution.
You can learn more at www.irs.gov. Search for Publication 560, Retirement Plans for Small Business.