One of the benefits of owning a business is being able to deduct business expenses. Deductions incentivize businesses to invest back into their company while boosting the economy through spending.
We chatted with accountant Kari Kerby of Kerby Accounting in Orlando to find out what businesses need to know about deducting business expenses.
Which expenses are eligible for a deduction?
According to the IRS, business expenses must be “ordinary and necessary.” That means items like business accounting software, marketing expenses, insurance, and office equipment. That means that when it comes to your phone system, you can deduct both the cost of the hardware (whether purchased or leased) and the monthly service cost. According to Kerby, “100% of leased hardware and 100% of service dues – whether charged annually or monthly – can be deducted from your taxes.”
When do businesses need to purchase assets by?
In order to make a deduction on your April taxes, you need to have paid for your purchases by December 31 of the prior year. The payment must be complete – if you just have an invoice and pay later, then that will count towards the next year. For the maximum deduction, complete payments in full before the end of the year.
How much can I deduct?
There isn’t exactly a limit on how much you can deduct. However, many advise against taking too many deductions – as this can make your business more likely to be audited by the IRS. Always consult with an accountant when preparing and filing your taxes.
For business equipment such as printers, modems, and desk telephones, Kerby advises that there are a few different routes you can take. “When buying new equipment, a good deduction to take is on the depreciation of the equipment,” she says. “The asset class life is 7 years. That means you can either divide the cost of the equipment by 7 and take that deduction each year for the next 7 years or choose a 179 election which allows you to take the whole deduction at once.”
Can’t I just deduct the expense next year?
It’s true that anything you buy after December 31 can just be deducted from your next year taxes. However, there are a lot of things that can change in a business in a year. You could have other large expenses that count towards your maximum deduction allowance. Or, you may need to sell your business. It’s a good practice to take whatever deductions you can get now because the future can be unpredictable.
For small and medium sized businesses, tax deductions are vital to helping them stay afloat and to positively impact the economy through purchasing and job growth. Deductions on hardware depreciation exist to encourage business owners to reinvest in their company while stimulating the economy.
By purchasing necessary hardware upgrades before the end of the year, you’ll be setting yourself up for success next year by getting the maximum amount of deductions for your business.