Tax Deductions for Small Business Owners

Tax Deductions for Small Business Owners

Small business owners need all the tax help which is available. Tax deductions allow small business owners to keep more of what they earn. With a 35% marginal tax rate, the government is a silent partner who takes no risk and over one-third of the profits. Tax deductions are neither simple, straight forward, or intuitive. However, the effort to increase tax deductions is well worth the effort.

Tax Help Tip 1: Tax deductions reduce taxable income for small business owners but do not directly reduce federal income taxes. (Tax credits, such as low income housing investment tax credits, directly reduce federal income taxes) Both cash and non-cash tax deductions merit review.

Tax Help Tip 2: Cash disbursements can be expensed (used as a tax deduction in the current year) or depreciated (capitalized and depreciated or amortized over a period of years). Due to the judgment required to determine what should be capitalized, there is some discretion. For example, a local gang paints graffiti on a portion of the side of your building. You decide to repaint the entire side of the building instead of just the portion with graffiti. Is this a repair (can be used as a tax deduction) or should it be capitalized (and depreciated over time)? Some owners would elect to expense repainting the entire building. Business owners should seek counsel from their advisor regarding discretionary tax deductions.

Tax Help Tip 3: Real estate provides bountiful tax deductions for small business owners. Most real estate owners inadvertently understate depreciation and thus forego available tax deductions. The common practice is to simply separate land and long-life property (depreciated over 39 years for commercial property and 27.5 years for rental residential property). Real estate owners can typically increase depreciation by 50-100% in the first 5-7 years of ownership by utilizing cost segregation. Cost segregation can separate up to 130 items that can be depreciated over 5, 7, or 15 years (instead of 27.5-39 years). These short-life items typically comprise about 20-40% of the improvement cost basis. The increased depreciation increases tax deductions.

Cost segregation can be utilized for recently purchased or built properties and for properties owned for a period of years (1/1/87 or later). Long-term real estate owners can claim a one-time tax deduction windfall using catch-up depreciation.

Tax Help Tip 4: After a cost segregation study is prepared, the owner can “catch-up” previously under-reported depreciation (without filing any amended tax returns).

Tax Help Tip 5: Another source of “hidden” tax deductions is a careful review of your fixed asset schedule. Many fixed asset schedule include items which should have been expensed or which have been discarded (or should be thrown away). Misclassified items are another source of additional tax deduction. In some cases the depreciation life for an asset has been overstated through clerical error. A fixed asset audit typically generates meaningful tax deductions.

Other Tax Help Articles: Other non-cash sources of tax deductions are amortization, casualty losses, and charitable contributions, which are addressed in separate articles. Planning tax deductions requires a modest effort but the rewards are worth the effort. You work hard to serve your clients and earn a profit; don’t give more than is legally required to your silent partner.

Click here for a FREE preliminary analysis of income tax savings for your property.

Cost segregation produces tax deductions and reduces federal income taxes across the country and in every size market. Below are just a few examples of cities where cost segregation generates meaningful tax deductions.

City:

• Memphis, TN


• Baltimore, MD


• Las Vegas, NV


• Boston, MA


• Miami, FL


• New Orleans, LA


• Atlanta, GA


• Washington, DC


• Phoenix, AZ


• Houston, TX


• Albuquerque, NM


• Sacramento, CA


• Sarasota, FL


• Salt Lake City, UT


• Albany, NY


• Virginia Beach, VA


• Oxnard, CA


• New Haven, CT


• Chicago, IL


• Kansas City, MO


• Buffalo, NY


• Jackson, MS


• Tucson, AZ


• Raleigh, NC


• Dayton, OH


• Pittsburgh, PA


• Scranton, PA


• Jacksonville, TN


• Portland, OR


• Birmingham, AL

Cost segregation produces tax deductions for virtually all property types, including the following:

Property Type:

• Veterinary clinic


• Single-tenant retail


• Auto dealer


• Amusement park


• Community shopping center


• Convenience store


• Airplane hangar


• Research and development


• Shopping mall


• Office warehouse

Almost every industry, including the following, can generate cost-efficient tax deductions by using cost segregation.

Industry:

• Arts, Entertainment, and Recreation


• Frozen food manufacturing


• Real estate lesser


• Plastic and rubber products manufacturing


• Warehousing and storage


• Building supply dealers


• Electronic and appliance stores


• Food and beverage stores


• Durable good wholesalers


• Electrical component manufacturing

O’Connor & Associates is a national provider of commercial real estate consulting services including cost segregation studies, due diligence, commercial real estate appraisal, Lease Abstraction-,tax deduction, cost segregation, property tax, market research, estate taxes, Collin central appraisal district, Tips and Tricks for Appealing Your Property Taxes in Dento, denton county appraisal and Federal tax reduction. O’Connor appraisers have appraised over 100 types of real estate including auto service garages, service center warehouses, student housing, shopping malls, subsidized housing, commercial buildings, drugstores, office warehouses, racket clubs, office buildings, cold storage facilities, shopping centers, regional malls, strip shopping centers, used car lots, health spas, auto salvage yards and banks.