Tax Deductions (Three Business Tax Deductions Which are Often Overlooked)
Tax deductions indirectly reduce federal income taxes by reducing taxable income. Tax reductions are essential to minimizing taxes yet often receive modest attention. Businesses focus intensely on increasing revenue and reducing expenses. However, less attention is sometimes given to reducing one of the largest expenses – federal income taxes.
Tax are simplistically calculated as follows:
Revenue – Tax Deductions = Taxable Income
Taxable Income X Tax Rate = Income Taxes
Most business activity is focused on increasing revenue or decreasing expenses, both of which increase federal income taxes. Most tax deductions are operating expenditures which require a cash expenditure. Three lucrative tax deductions are cost segregation for real estate depreciation, revisions to the fixed asset schedule, and writing off bad debts. None of these require a cash expenditure.
Tax deductions are generated from real estate by calculating depreciation. Most real estate depreciation schedules understate depreciation by simply separating land from long-life property. However, real estate contains up to 130 components which can be separately over a shorter period than the building structure. The short-life components can be depreciated over 5, 7, or 15 years while the main portion of the building (long-life portion) is depreciated over 27.5 years for rental residential property and 39 years for commercial property.
Obtaining a cost segregation study from an appraiser who specializes in this area usually increases depreciation by 50-100% during the first 5-7 years of ownership. You can sharply increase tax deductions for properties owned more than one year by combining a cost segregation study with “catch-up” depreciation under-reported in prior year with the tax return filed after obtaining the cost segregation study. It does not require filing amended tax returns.
Fixed assets schedules are often fertile territory for harvesting tax deductions. There are at least 3 categories of tax deductions available in most fixed asset listings: 1) items improperly placed on the fixed asset listing (such as repairs, maintenance, and operating expenses), 2) items no longer owned by the company (i.e., have been discarded, lost, or sold) and 3) items with a depreciation life longer than is appropriate.
Given the voluminous nature of fixed asset listings at many companies, it is not feasible to regularly conduct a comprehensive review to search for hidden tax deductions. However, these records often an attractive opportunity. If internal staff is not available, it is worth considering outsourcing this task.
Allowance for bad debt is also an under-utilized option for tax deduction not requiring a cash disbursement. Reasonable people can disagree on what portion of accounts receivable will not be collected. Estimate of bad debt involve both art and science. For example, what if a large client is rumored to be considering filing for bankruptcy or has suddenly been making minimal payment with no explanation? What is a large portion of your rental furniture business has been affected by massive flooding from a hurricane?
Tax deductions reduce federal income taxes and provide more capital for business to prosper and grow. Reviewing real estate depreciation tables, fixed assets schedules, and accounts receivable for hidden tax deductions will reduce your federal income taxes and provide capital for growth.
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:
- Houston, TX
- New Orleans, LA
- Tampa, FL
- Los Angeles, CA
- Denver, CO
- Philadelphia, PA
- Dallas/Ft. Worth, TX
- San Francisco, CA
- Phoenix, AZ
- Washington, DC
- Springfield, MA
- Harrisburg, PA
- Albuquerque, NM
- Columbus, OH
- Fresno, CA
- Wichita, KS
- Charleston, SC
- Knoxville, TN
- Albany, NY
- Cleveland, OH
- Youngstown, OH
- Stockton, CA
- Birmingham, AL
- Milwaukee, WI
- Durham, NC
- Poughkeepsie, NY
- Little Rock, AR
- Manchester, NH
- Pittsburgh, PA
- San Diego, CA
Cost segregation produces tax deductions for virtually all property types, including the following:
Property Type:
- Restaurant
- Truck stop
- Student housing
- Regional mall
- Mobile home park
- Single-tenant retail
- Convenience store
- Office building
- Fast food restaurant
- Medical office
Almost every industry, including the following, can generate cost-efficient tax deductions by using cost segregation.
Industry:
- Fabricated metal products
- Plastic and rubber products manufacturing
- Air transportation
- Machinery manufacturing
- Leather product manufacturing
- Transportation equipment manufacturing
- Publishers
- Truck transportation
- Automotive repair facilities
- Computer and electronic manufacturing
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