Deducting Business Assets
In order to maximize your profits, you’ll want to be sure you’re getting all the tax deductions you can. There are two types of costs you’ll need to deduct in your career working for yourself: 1) business expenses and 2) business assets. While both can be deducted, the process for each varies a bit. You can track business expenses easily in the Stride Tax app, however, you’ll want to keep track of business assets separately from the app for the time being.
Is it a Business Asset or an Expense?
Business assets and expenses are classified differently based on the concept of useful life. The "useful life" of an asset is the estimated length of time that the asset can be used effectively for your business. Business expenses are goods or services with a useful life of less than one year. Business assets, on the other hand, remain useful for more than one year.
Think of expenses as the incidental goods and services you pay for in order to run your business: business cards, a plane ticket for a work trip, or a bouquet of flowers for your Airbnb guest.
Assets, meanwhile, are properties which you will get use out of for years to come. In your career working for yourself, you are most likely to purchase assets like vehicles, tools, computers, furniture, and even buildings used for business purposes. At least for the time being, you’ll need to track your assets separately from the Stride Tax app.
Depreciating a Business Asset
In order to deduct the cost of a business asset, you will need to choose whether to claim the cost all at once or to spread these deductions across the useful life of the asset by claiming depreciation.
When you depreciate an asset, you deduct a portion of the asset's cost each year for its entire useful life. For example, if you buy a piece of office furniture with a useful life of 10 years, you deduct one tenth of the cost of the furniture every year for 10 years.
If you've bought an item for your business that has a useful life of over 1 year (like a piece of equipment), then you'll need to choose one of two depreciation methods and report it as a business asset on your tax return using Form 4562:
1. Depreciate the cost of the asset over its useful life
This means you will deduct a portion of the asset’s costs each year, following the depreciation schedule listed by the IRS for that type of property. This system is called the Modified Accelerated Cost Recovery System (MACRS). Almost all business assets can be depreciated using this system; however, the work of tracking depreciation year-to-year can be somewhat cumbersome.
2. Deduct the entire cost of the asset this year.
The cost of certain properties can be deducted up-front, the year they are purchased, under a method called Section 179. To use this method, the asset must be a qualified property, which most business equipment count as, and be used for work over 50% of the time. For example, if you bought a new phone to use for your Uber work, but only use it for work 25% of the time, the cost of the phone would not be eligible for the 179 deduction.
The Right Depreciation Method for Your Business
Which depreciation method you should choose depends on what would be most helpful for your business: would you rather be able to deduct the entire cost of the asset this year, or be able to deduct a portion of it for multiple years?
Deducting the entire cost of a business asset in the first year (Section 179) allows you to reduce your taxable business income for that year as much as possible, thus maximizing your take-home profits. If you’re making a profit, it's probably easiest for you to simply claim Section 179. However, if you expect your business to continue to operate at a profit and you want to ensure you'll have deductions in the future, then you may choose to depreciate an asset over time.
The best decision will be different for each business owner, and we’re always happy to help you think this question through! Please reach out to us for assistance at firstname.lastname@example.org if you have any more questions!