Small Business Tax Deductions You Can Take
As a new business owner in the state of Wisconsin, there are a number of major decisions that you need to make. Among the most important are the choices that you make with regards to the expenses that you are likely to incur while setting your business up. Though you may think that you can simply deduct any expense involved in your business’ start up, the reality is a bit more complex, as equipment purchases, vehicle purchases, leasehold improvements and organizational costs – among others – are each handled differently. The more that you know about how the Internal Revenue Service treats a business’ first year expenses, the more strategic you can be .
There are so many expenses, small and large, involved in investigating and setting up a new business. These can include:
- Conducting an analysis or survey of the labor supply, what products will best suit your business, the market potential, what transportation and delivery services are available, what facilities are available and more.
- Fees paid to consultants brought in to train employees, as well as the wages that you need to pay employees while they are being trained.
- The cost of advertising and marketing for your new business.
- The fees charged by consultants and other professionals who are assisting you in getting your business up and running.
- The costs of traveling to and from suppliers, distributors, and potential customers in order to establish the business.
Each of these expenses are deductible up to $5,000 during your business’ first year, but if your start-up fees go beyond $50,000 then the $5,000 amount will be reduced. If you take the start-up deduction election, then any amount over the first-year deductible amount will be subject to a 15-year amortization. If, on the other hand, you do not choose the election then you will need to capitalize the start-up costs. This would mean that you will only be able to recover the expenses at the time that you either sell the business or close it.
This specifically refers to the costs involved in determining and establishing the kind of entity that your business will be organized as. If you are setting up as a corporation or partnership you will be able to elect to deduct up to $5,000 in the first year, just as you did your start-up expenses.
The same rules apply regarding organizational expenses over $50,000 as do for start-up expenses. Amounts that go above the limit will either need to be amortized over 15 years or if you opt out of the election then the fees that you pay for organization, which may include incorporation fees, temporary directors’ fees, legal services and organizational meetings, will not be retrievable until you terminate or dispose of the business, at which time they will be treated as capital expenses.
Equipment and Vehicles
Many businesses require equipment. This may be something as simple as a laptop or desktop computer and cell phone or something as elaborate as manufacturing equipment. Though these costs are deductible, you may not take the write off until the time that the equipment is actually being used and the business is actually operating.
Though that can be a challenge if there is an extended period of time between the purchase and the business’ opening, the downside is offset by the fact that in most cases you will be able to write off the entire cost in that first year, as long as the amount that is deducted does not exceed your taxable income from all of your active trades or businesses (and your spouse’s as well if you are married and filing jointly). The taxable income limitation does include any income either of you receive as a W-2 employee.
If you choose not to write off the entire cost of the purchase in the first year of your business, you can depreciate the equipment over its useful life. You are required to follow the IRS guidelines for recovery periods, which are established based upon the type of equipment that is being depreciated. For most equipment, fixtures and office furniture the period is seven years, while computers have a shorter depreciation period of just five years. Keep in mind that if you opt for depreciation rather than writing off the entire expense, you are able to take advantage of a 50% bonus depreciation in the first year.
If you will be purchasing a light truck or automobile for your business, the rules are very similar to those for purchasing equipment. The only difference is that the recovery period for a vehicle is the same as that for a computer – just five years – and that there is a rule (called the luxury auto rule) that limits the maximum depreciation in a year to $3,160 for the first year for cars, and $3,560 for vans and light trucks. Vehicles also have a different maximum for the first year with the 50% bonus depreciation – it is $8,000.
If you are moving into a rented space and plan on making leasehold improvements, you are able to depreciate their costs over a 15-year period. For the next few years, until the end of 2019, businesses are able to take a first year bonus depreciation of between 30 and 50 percent on non-residential property once the building is placed in service. The Section 179 expense deduction can be taken on qualified restaurant properties, qualified retail improvements and on qualified leasehold properties.
Contact Us for Professional Advice
Wisconsin entrepreneurs who take their time and plan ahead can take advantage of these rules and give themselves the benefits of some significant tax savings. The secret lies in making sure that you fully understand how to make them work for you. If you need help leveraging the first year expense tax rules and are looking for the best way to plan your purchases, contact our office today and set up an appointment to come up with a smart strategy. We will make sure that you are getting the best tax advantage possible.
Starting a small business in Wisconsin? Call us at 715-365-6512 for a free consultation!