Business deductions are based on the spending or the use of existing resources. Generally, your personal spending is not tax deductible but with a business you can find ways to write off some of these expenses that qualify. Preserving cash in a small business is extremely important so business owners have to find the right balance between tax deductions and maintaining steady cash flow to keep their business moving. The best deductions are the ones that don’t cost extra money, with a few habit changes you can implement these strategies while reducing your taxes.
Here are 2 ways you can increase your deductions without spending cash in your business.
If you have assets that are depreciated, fixing errors can save thousands in taxes.
Depreciation is such a valuable tax deduction because unlike most deductions, it doesn’t cost you a penny more than what you’ve already spent in order to reap the benefits. In fact, you don’t have to spend anything in the current tax year to claim it (i.e., you could finance the purchase that you are depreciating).
If you simply didn’t claim depreciation on an asset, didn’t know you could take depreciation, or just flat out claimed the wrong depreciation, correcting depreciation could potentially save you thousands of dollars on this year’s tax return.
First, because you failed to claim the correct depreciation in prior years, you are going to have what’s called a negative Section 481(a) adjustment (negative for the government, but positive for you) equal to the total amount of your missed depreciation. This means you will take all the missed depreciation in one lump sum in the tax year when you make your automatic accounting change (no user fee since this qualifies as an automatic change). IRS Form 3115 and a one-to-two-page Section 481(a) adjustment worksheet attachment must be filled out, in which the dollar adjustment is calculated and you answer some questions for the IRS about the depreciation adjustment.
Second, with a bit of tax planning as to the year you make the automatic change, you can ensure you realize the best possible tax benefits from your missed depreciation.
If you think that you may have missed out on deductions for depreciation of assets, with some planning, this missed deduction can turn into your good fortune. One trigger that can cause depreciation errors includes changing tax preparers, the information may not have carried over properly from the previous year.
Heavy Vehicle + Deductible Home Office = Major Tax Savings
You can reap major tax savings with the heavy vehicle and home-office combo. The heavy vehicle produces quick deductions. The home office that qualifies as a principal office eliminates commuting miles, and such elimination can dramatically increase your business-use percentage of vehicles.
For example, say you bought a $50,000 vehicle that you use 60 percent for business. Your depreciation and expensing elections apply to $30,000. But if you can increase your business percentage to 90 percent with a tax code–defined principal office in your home, your base for tax deductions increases to $45,000—that’s a $15,000 increase, and you did not spend a penny or drive a mile farther to capture it.