Are you wondering, “What assets can I depreciate to maximize my tax savings?”
Some common assets that you can depreciate, according to IRS guidelines, include:
- Furniture & Fixtures
- Other Assets with a business purpose
This list is not exhaustive, and other assets may also qualify for depreciation deductions. Always be sure to consult the IRS guidelines and seek professional advice when determining what assets you can depreciate.
Various Depreciation Methods Including Bonus and Section 179
In addition to identifying eligible assets, it’s essential to understand the four main ways to write off your business assets, each with its own set of rules and benefits:
- Normal Depreciation: This method allows you to write off assets over a prescribed time period determined by the IRS based on your asset’s class.
- Bonus Depreciation: As permitted by the IRS, this method enables you to write off 50-100% of your asset’s cost (generally).
- Section 179: This IRS provision allows you to write off 100% of your asset’s cost, subject to certain limitations.
- Cost Segregation: This advanced strategy can help you accelerate depreciation deductions for real estate. You can learn more about how cost segregation works here.
Timing Depreciation Deductions for Maximum Tax Savings: Cash Flow, Marginal Tax Rates & Strategies
In order to maximize your tax savings, it’s essential to consider the timing of your depreciation deductions based on your business’s cash flow and marginal tax rate. Properly timing your deductions can help you optimize your tax benefits and improve your overall financial position.
When timing depreciation deductions, you should consider the following factors:
- Cash Flow: Assess your current and projected cash flow to determine when you would benefit the most from depreciation deductions. If your business is expecting a cash flow shortage in the near future, accelerating depreciation deductions can help you reduce your tax liability, thus increasing your available cash.
- Marginal Tax Rate: Your marginal tax rate also plays a crucial role in determining the best timing for depreciation deductions. The value of a depreciation deduction increases as your marginal tax rate rises. For example, if you have a marginal tax rate of 25%, a $1,000 depreciation deduction would save you $250 in taxes. However, if your marginal tax rate is 35%, the same $1,000 deduction would save you $350. Therefore, it’s essential to time your deductions when your marginal tax rate is at its highest to maximize your tax savings.
Depreciation Deduction Value: Comparing Tax Savings at Different Marginal Tax Rates
Here’s another simple example to illustrate the value of depreciation deductions at different marginal tax rates:
Assume you have an asset with a cost of $10,000 and a five-year useful life. Using the straight-line depreciation method, you would deduct $2,000 each year for five years. Now, let’s consider two different marginal tax rates, 25% and 35%.
- At a 25% marginal tax rate, the annual tax savings from the $2,000 deduction would be $500 ($2,000 * 25%), resulting in total tax savings of $2,500 over five years.
- At a 35% marginal tax rate, the annual tax savings from the $2,000 deduction would be $700 ($2,000 * 35%), resulting in total tax savings of $3,500 over five years.
As you can see, the value of the depreciation deduction increases with higher marginal tax rates.
As you can see, it’s crucial to evaluate your business’s financial situation and consult with a tax professional. If you would like to talk to a CPA about this, you can schedule a consultation here.