The Small Business Administration has declared the week of September 13-17 to be National Small Business Week. Here are three tax breaks you should consider as we celebrate small businesses this week.
Tax breaks for asset additions
Qualified new and used property that is acquired and placed into service by your business this year is eligible for 100% first-year bonus depreciation under current law. Because of this, you may want to consider making new acquisitions by December 31, as you may be able to write off the full cost of some or all of these asset additions on this year’s return.
However, it’s worth noting that claiming a 100% bonus depreciation deduction in the first year you place a qualifying property in service isn’t always the best idea. For instance, it might be better to depreciate your 2021 asset acquisitions over time instead of taking the bonus depreciation if you have reason to suspect that tax rates will rise in the future due to a change in income or tax law.
Certain asset purchases may also be eligible for a Section 179 deduction. For qualifying property that is placed in service in 2021, the maximum deduction available through Section 179 is $1.05 million.
Although both Section 179 and bonus depreciation have been enhanced by recent tax laws, most businesses will see more benefit by claiming bonus depreciation. You don’t have to decide which to claim until you file this year’s tax return, and we can help guide you through the details of these tax breaks so you can decide which is right for your business.
Tax breaks for heavy vehicles
Heavy vehicles are treated as transportation equipment for federal tax purposes, which means that new and used heavy SUVs, pickups, and vans qualify for 100% first-year bonus depreciation as long as they’re used for over 50% for business.
This tax break can only be claimed for vehicles with a gross vehicle weight rating (GVWR) of above 6,000 pounds. The manufacturer’s label, which is usually located on the inside edge of the driver’s side door, should state the GVWR for the vehicle.
Your business may be able receive a significant write-off on this year’s tax return if you invest in an eligible heavy vehicle and place it in service before the end of 2021. We can help you decide what’s best for your business prior to signing a sales contract.
Pass-through business QBI deductions
Qualified business income (QBI) from pass-through entities is eligible for another valuable deduction. Up to 20% of a pass-through entity owner’s QBI can be deducted for tax years through 2025, although some restrictions may apply based on the owner’s taxable income at higher income levels.
For the purposes of QBI deductions, pass-through entities include sole-proprietorships, partnerships, single-member LLCs that are treated as sole proprietorships for tax purposes, and LLCs that are treated as partnerships for tax purposes. Taxpayers that qualify for these deductions can also claim a deduction for up to 20% of qualified income from publicly traded partnerships and 20% of income from qualified real estate investment trust dividends.
Due to various limitations on QBI deductions, certain tax planning moves might unexpectedly increase or decrease them. For instance, strategies that reduce your taxable income for this year might have the unwanted consequence of reducing your QBI deduction.
Contact us for assistance
There are also many other tax breaks that may be available to your small business. If you need assistance optimizing your tax results or evaluating your options, contact us.