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Using a Depreciation Deduction for Your Small business

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Depreciation is a tax deduction that allows small businesses to recover the cost of assets over time. Assets that can be depreciated include equipment, furniture, buildings, and vehicles.

To claim a depreciation deduction, you must first determine the asset’s depreciable basis. The depreciable basis is the asset’s cost, less any down payment or trade-in. Once you have determined the depreciable basis, you must then determine the asset’s useful life. The useful life is the number of years that the asset is expected to be used in your business.

The IRS publishes tables that list the useful lives of different types of assets. Once you have determined the asset’s useful life, you can then calculate the depreciation deduction. The depreciation deduction is calculated by dividing the depreciable basis by the asset’s useful life.

For example, if you purchase a computer for your business for $1,000, the depreciable basis would be $1,000. If the IRS table lists the useful life of a computer as five years, then the depreciation deduction would be $200 per year.

You can claim depreciation deductions on your business tax return each year. The depreciation deduction will reduce your taxable income, which will save you money on taxes.

Depreciation and Section 179

In addition to the regular depreciation deduction, small businesses may also be eligible for a special deduction called Section 179. Section 179 allows businesses to deduct the full cost of certain assets in the year they are purchased, rather than depreciating them over time.

To be eligible for Section 179, the asset must be tangible personal property, such as equipment, furniture, or computers. The asset must also be used in the business for more than 50% of the time.

The amount of the Section 179 deduction is limited each year. For 2023, the maximum Section 179 deduction is $1,080,000. If your total purchases of depreciable assets exceed $2,700,000, the maximum deduction will be phased out.

Depreciation and Your Taxes

Depreciation can be a valuable tax deduction for small businesses. By claiming depreciation deductions, you can reduce your taxable income and save money on taxes.

If you are not sure how to calculate depreciation or if you are eligible for Section 179, you should consult with a tax professional.

Here are some additional tips for using depreciation for a tax deduction in a small business:

  • Keep good records of your assets and their purchase dates. This will help you to calculate your depreciation deductions accurately.
  • Use the IRS tables to determine the useful life of your assets.
  • Claim depreciation deductions on your business tax return each year.
  • If you are eligible for Section 179, take advantage of it. This can save you a significant amount of money on taxes.

By following these tips, you can use depreciation to reduce your tax liability and save money on taxes.

How does the Secure 2.0 Act affect your retirement?

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The SECURE 2.0 Act of 2022, which was signed into law by President Biden on December 22, 2022, makes a number of changes to the tax code with respect to retirement savings. Some of the most significant changes include:

  • Increased age for required minimum distributions (RMDs). The age at which individuals must begin taking RMDs from traditional IRAs and 401(k) plans will increase from 72 to 73 in 2023, and then to 75 in 2033. This means that individuals will have more time to grow their retirement savings tax-deferred.
  • Increased catch-up contributions for older workers. The amount that individuals age 50 and older can contribute to their 401(k) plans will increase from $6,000 to $6,500 in 2023, and then to $7,000 in 2024. This will help older workers save more for retirement.
  • Expanded access to retirement savings for long-term, part-time workers. Employers with 401(k) plans will now be required to allow long-term, part-time workers to participate in the plans. This will help more workers save for retirement.
  • New tax credit for small businesses that offer retirement plans. Small businesses that offer retirement plans to their employees will now be eligible for a new tax credit. The credit is equal to 50% of the administrative costs of the plan, up to a maximum of $5,000 per year.

The SECURE 2.0 Act of 2022 is a significant piece of legislation that will have a positive impact on retirement savings for millions of Americans. The changes to the tax code will make it easier for individuals to save for retirement and will help them reach their retirement goals.

In addition to the changes to the tax code, the SECURE 2.0 Act also makes a number of other changes to retirement savings, including:

  • Automatic enrollment in 401(k) plans. Employers with 401(k) plans will now be required to automatically enroll employees in the plans, starting at a contribution rate of 3% of their salary. Employees will be able to opt out of the automatic enrollment, but they will have to take affirmative action to do so.
  • Roth 401(k) plans. All employers that offer 401(k) plans will now be required to offer Roth 401(k) plans as well. This will give employees more flexibility in how they save for retirement.
  • Increased access to retirement savings for survivors of domestic abuse. Survivors of domestic abuse will now be able to withdraw up to $10,000 from their retirement savings accounts without penalty. This will help them to secure their financial future after experiencing domestic abuse.

The SECURE 2.0 Act is a comprehensive piece of legislation that will make it easier for Americans to save for retirement. The changes to the tax code and the other provisions of the act will help millions of people reach their retirement goals.

What is a Schedule C? (Parts III, IV, V)

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Page 2 of the Schedule C form has parts III, IV, and V. These sections are also used for expenses.

Part III

Part III of Schedule C is used to report the cost of goods sold for businesses that sell products. This section includes the following lines:

  • Line 32: Beginning inventory
  • Line 33: Cost of goods purchased
  • Line 34: Cost of labor
  • Line 35: Cost of materials and supplies
  • Line 36: Other costs
  • Line 37: Ending inventory

The total of these lines is subtracted from the gross receipts on line 1 to calculate the cost of goods sold. This number is then used to calculate the gross profit on line 4.

Part III of Schedule C is important because it helps to accurately determine the profitability of a business. By tracking the cost of goods sold, businesses can identify areas where they can reduce costs and improve their bottom line.

Part IV

Part IV of Schedule C is used to report information about the use of a vehicle for business purposes. If you use your personal vehicle for business, you can deduct certain expenses related to its use, such as gas, oil, and repairs. However, you must keep accurate records of your mileage and expenses in order to claim these deductions.

To report your vehicle expenses on Schedule C, you will need to provide the following information:

  • The make, model, and year of your vehicle
  • The date you acquired the vehicle
  • The vehicle’s odometer reading at the beginning and end of the year
  • The total miles you drove the vehicle for business purposes
  • The total expenses you incurred for the vehicle, such as gas, oil, repairs, and insurance

You can claim the standard mileage rate for your vehicle expenses, or you can deduct the actual expenses you incurred. The standard mileage rate for 2023 is $0.585 per mile. If you choose to deduct the actual expenses, you will need to keep receipts for all of your expenses.

Part 4 of Schedule C is an important part of your tax return if you use your personal vehicle for business purposes. By accurately reporting your vehicle expenses, you can reduce your taxable income and save money on taxes.

Part V

Part 5 of Schedule C is used to report any other expenses that are not listed in Parts 1-4. This could include expenses such as office supplies, professional fees, or travel expenses. The total of these expenses is entered on line 27a.

The expenses reported on Part V are usually items that don’t fit into an of the categories already listed on the form in part II. You can use this section to enter expenses you have that are specific to your business. If you are a hair stylist you might put the amount you paid for clippers and scissors here. A restaurant/bar could put CO2 purchases here.