October 2, 2022

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Business Property Relief -A Valuable Form Of Tax Relief

Most likely you have heard about the Foreign Earned Income Exclusion (FEIE) and the Foreign Housing Exclusion (FHE), that allow businesses to exclude certain types of income from taxation. The FEIE and FHE are great tools for reducing business taxes, but they do not help with all forms of business property tax. There are only two types of property tax relief for businesses: a deduction for depreciation, and a deferral, which is an extension of time in which to pay property taxes.

To get the most from your deductions or deferral, it’s important to carefully observe when you need them each year as well as when your other deductions or exemptions will be available. This article will give you an overview of each method and help you decide which is best for your situation.

Depreciation Deduction

Depreciation is the most common form of business property tax relief available in the USA. Virtually every type of business property (minus inventory) can be depreciated over its useful life, which may differ from the actual lifespan of that property. The amount of depreciation allowed each year is limited by some fairly complicated rules, but it is almost always more than the amount you’ll need to pay in taxes unless property taxes are much higher than normal in your area. The crucial thing is to calculate the depreciation in your business to maximize the benefits of this form of property tax relief.

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How Depreciation Works

For each depreciable asset, a taxpayer first determines its basis. The basis is the amount a taxpayer pays for an asset (such as $1,000 for an office chair). The taxpayer then determines how long that asset will be useful and continues to produce income (in terms of years or months) and divides the depreciated value by that length of time. For example, if a taxpayer buys an office chair for $1,000 with a useful life of 5 years and the expected income that chair will produce is $500 per year, the taxpayer’s depreciation deduction would be $200 – ($500/5) = $200 (or 20%).

The depreciation deduction is limited to the amount of income produced by that property. If the property doesn’t produce any income (such as with land or most buildings), then the deduction cannot exceed the basis. But if there is no income from a depreciable asset it may still be depreciated, so long as its basis exceeds 0.

Business Property Exclusions

There are certain types of business property the taxpayer may exclude from depreciable life. A taxpayer can exclude from depreciable life any property with a useful life of 30 years or less, and also property that is used to produce income with a useful life of up to five years. Both types of business property must be extensive and integral parts of the taxpayer’s trade or business in order for it to qualify for exclusion. This means you have to use the asset in your business operations, like having an office space in which you perform business and expenses are deducted on your tax return.

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As an example, if you have a chair that is only used at work, you would have to figure out whether or not your business has a use of 30 years or less. If the expected life of the chair is 2 years, then it wouldn’t be excluded from depreciable life. A good rule of thumb is that if you don’t see an item in a typical store, then it probably won’t qualify as being used for 30 years (not including real estate).

Depreciation Deduction Versus Tax Deferral

A depreciation deduction doesn’t require any additional actions by the taxpayer. The taxpayer simply records the expense and deducts it from income on their tax return each year. Because of this, a depreciation deduction is usually a better choice than deferral. A tax deferral simply means that the taxpayer doesn’t pay taxes until they go to sell the property (or more often, after the transfer is completed) and then pays taxes on that sale at higher rates. Tax deferral can be very expensive in terms of increased taxes to pay over time when you would have paid tax immediately if you had taken a depreciation deduction. For example, say it costs $30,000 now (with no income) to buy an office chair with a useful life of 5 years. Now assume it will take 2 years for the chair to produce income of $500 per year.

Conclusion

The most important thing to remember is that a taxpayer must choose between a depreciation deduction and tax deferral each year. A taxpayer may not use both for the same asset in the same period.If a taxpayer takes both for the same asset, it has to figure out what method provides him or her the better deal (after any phase-out limits are applied) and use that method consistently from then on. If it makes sense to do so, then a taxpayer can change methods each year after checking their options. It’s important to understand how tax laws change each year, though, in order to determine whether or not you should switch your method of property tax relief.

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