Archives for November 2019

Can depreciation save your business money?

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Depreciation is a deduction from income tax that lets your firm recover the cost of property. Read on to see how the IRS allows for the wear and tear, deterioration or even obsolescence of items.

The depreciation of tangible property — buildings, machinery, vehicles, furniture, equipment and even cell phones — as well as intangible property, such as patents, copyrights and computer software, is allowed by the IRS in certain situations, and can be used to offset income from your business. Does your property meet these requirements?

  • You own the property
  • You lease the property and make capital improvements
  • You use the property in business and for personal purposes (In this case, you can only deduct depreciation for business use of the property)
  • The property has a determinable useful life of more than one year

However, not everything can be depreciated. For example, land is off the table because it doesn’t get used up and is not subject to wear and tear. Inventory is not depreciated either.

You depreciate an asset over time. When you place property in service to use in your business or trade or to produce income, that’s when depreciation begins. However, property stops being depreciable when you’ve fully recovered the property’s cost or other basis or when you retire it from service — whichever happens first.

There are different schedules for different items. For computers, office equipment, cars, trucks and appliances, the recovery time is up to five years. Office furniture and fixtures work on a seven-year schedule. Residential rental properties can be recovered over 27.5 years, while commercial buildings and nonresidential properties can be recovered over 39 years, depending on the year you acquired them.

There are three basic depreciation methods. Particular situations will dictate which ones are most appropriate for you. Keep in mind that you need to know the initial cost of the asset and how long you can depreciate it for.

  • Straight line — Depreciate the property an equal amount each year over its useful life
  • Accelerated method — Take larger depreciation deductions in the first few years of the property’s useful life and smaller deductions later on
  • Section 179 deduction — Deduct the entire cost of the asset the year it’s acquired

To ensure that you properly depreciate property, you need to consider:

  • The depreciation method for the property
  • The class life of the asset
  • Whether the property is “Listed Property” as defined by the IRS
  • Whether you’ve elected to expense any portion of the asset
  • Whether you qualify for any bonus first-year depreciation
  • The depreciable basis of the property

Use depreciation to decrease your company’s tax burden, as you are lowering your overall taxable income. Depreciation doesn’t affect your company’s cash flow or its actual cash balance — it’s a non-cash expense. But before making any decisions, remember to consult your tax professional.

4 income tax filing mistakes that could land you in tax trouble

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Thinking of preparing your own income tax return  this April? You might want to reconsider. Even the slightest oversights might mean hefty fines and penalties that could have been avoided. Watch out for these four mistakes before hitting the “submit” button.

#1 Neglecting to report all of your income.
Whether it’s your regular paycheck, a side gig, gains that you’ve made on the stock market or interest earned from deposits in the bank, you need to account for all of it in your tax return. If you don’t, the IRS may come knocking. Every time you make at least $600 in income working as an employee of any description, you get a 1099 form stating what you’ve made. Technically, you should also record smaller chunks of income for which you don’t get a 1099.

#2 Guessing what your deductions are.
Back up every attempt at a deduction with documentation like receipts or logs. If you attempt a rough estimate at what your deductions should be, you could trigger suspicion — especially if the sum you claim is high for your income level, or if it’s a convenient round figure.

#3 Automatically rejecting the idea of itemizing.
Most tax filers choose to take the standard deduction, rather than itemize. But, this doesn’t mean that you shouldn’t itemize — it really depends on your specific circumstances. If you have many legitimate deductions to make because you pay a great deal of mortgage interest, for example, itemizing may work in your favor.

#4 Procrastinating filing your return.
Preparing your taxes is a complex process. If you’re self-employed, or if you need to itemize, it man only get worse. Don’t rush through the process, as mistakes can be costly. Take the time to file your taxes well ahead of the deadline. If you need extra time, you can always file for an extension and avoid the late filing penalty, which can add up to a whopping 25% of the original tax amount.

Whatever you do, don’t skip filing altogether! At Magone & Company, we’re here to help. Give us a call at (973) 301-2300 for assistance in resolving any tax issues that come your way.

Understanding the tax implications of out-of-state workers

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Here in the tri-state area, where it’s a relatively easy commute from Connecticut or New Jersey to Manhattan, for example, it’s quite common for Magone & Company clients to have employees who reside out of state. And with remote workers becoming more common, you may have more employees who live across the country rather than around the corner.

When your firm has employees who live in one state and work in another, tasks like employment taxes can get a bit tricky. Taxes are generally paid in the state where your team works, but you may run into issues if:

  • Your company is located near a state border
  • You have employees who travel to job sites in other states
  • You have employees who work remotely
  • You are expanding into new states

Having some basic understanding of how the system works will help you make the right decisions about classifying wages and avoiding penalties or amended filings. Both state unemployment and withholding taxes should generally be paid to the employee’s work state, but there are exceptions; the twist is that state laws are (literally) all over the map. Be sure to familiarize yourself with the state legislation that applies to your team. Here are the basics:

Reciprocity agreements
Some states that border each other have entered into agreements allowing employees, who live in one state but work in another, to have their withholding tax paid to the work state. For example, an employee who lives in Maryland but commutes to northern Virginia or D.C. for a job can have withholding tax paid to Maryland rather than the work state. This is also known as courtesy withholding, and it means the employee can file one tax return each year.

If you have an employee complete a non-residency certificate to excuse him/her from tax withholding in their work state, let your payroll provider know that your employee has an agreement in place. If there’s no reciprocal agreement, your employee will most likely have to pay both nonresident and resident state income tax. But luckily, most states grant a tax credit to cover the cost of being taxed twice.

The unemployment tax situation is usually straightforward. When an employee is working in multiple states or working remotely for a company based in another state, employers typically withhold state unemployment tax only in the state in which the employee is working.

 When it gets complicated
Today’s remote-work world means situations that were rare or unheard of a generation ago are now commonplace. For example, consider an employee who works from her cabin in upstate New York, but your company is located in Atlanta — you’ll have to pay all state taxes to New York because that’s where the work is actually being completed.

Or, at that same Atlanta company, you have an employee who needs to work in Maine temporarily for three months. For nine months, you pay taxes in Georgia, and for three months, you pay taxes in the Pine Tree State.

As always, there are exceptions and special circumstances which may also impact your firm’s tax situation, so be sure to consult your trusted tax advisor for specifics. Need help with your cross-border workforce? The professionals at Magone & Company can help you organize your tax system accordingly.