Small Business Property – Tax Implications

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What is business property?

Every business, large or small, has property of some sort. Business property may include land or buildings, but it also can include smaller things like a computer, printer, desk or filing cabinets. Business property affects the value or “worth” of your business and it can also impact the taxes of your business. It is important to keep records of your business property and to be aware of how sales and depreciation needs to be reported on your taxes.

 

What are the types of business property?

Business property (as the IRS will call it), or business assets (the term your accountant will use) can come in different “types.” It’s important to know the different property types, because it will affect your balance sheet and taxes due each year. Here are several types of business property:

  • Real Property: Also called real estate and may include land, buildings, or structures. Examples of real property include:
    • Warehouses
    • Factories
    • Buildings or fixtures on the property that cannot be moved
    • Anything beneath the surface of the property, such as oil, minerals or natural gas
    • Property Improvements – Also called leasehold improvements that cannot be removed.
    • The rights to use of the property
  • Personal Property: This includes anything that is not affixed to the property, (the things you can pick up and move, if you wanted to.) These may include:
    • Equipment
    • Furniture
    • Vehicles
    • Fixtures (a storage rack, for instance)
  • Listed Property: This is a specific type of personal property (the IRS watches deductions for these types of property closely). Listed property is property that is used for both business and personal use. Examples may include:
    • Vehicles – The mini van that you drive your kids to school in, but also use for your flower-shop’s deliveries.
    • Computers – The laptop your kid uses for school work, and that you then balance the books with, once they are asleep.

 

Why does it matter what type of property or business assets I have?

Business property, or business assets become part of the value of your business. Not only is it important to know the value, or the worth of your business; but it impacts your taxes and the ability to expand or obtain a loan or make additional investments.

For tax purposes, personal property can be depreciated, which will save you money on your yearly taxes. Real property is not depreciated, but you will show it as an asset on your balance sheet add to the net value of your business.

 

How does property affect taxes?

There are different tax implications regarding property, based on the type of property you have and use in your business. The types of taxes may impact your business profit or loss and can affect your overall value in the following ways:

  • Property Tax: An amount you pay as a business, which is assessed by local entities, such as your town, city or county and is used locally for things like schools or roads.
  • Depreciation on business property: Directly affects the amount of taxes you will owe, by decreasing the “on paper value” of your business. You can take a tax deduction for depreciation expense on long-term business property such as machinery, vehicles, computers or furniture.
  • Expenses for use of business property: Legitimate deductible business expenses include things such as business driving expenses – as long as you are able to show that the expense is business-related. Those tolls you had to pay to deliver the flowers to those 10 customers in another city? Legitimate business expense!
  • Interest expense: Can also be included on your tax return as an expense of doing business when selling business property.

 

What if I want to sell business property?

When you sell business property, it has a direct implication on income taxes and real estate taxes. Sales of business property must be recorded and included on your business tax return using this form:

IRS Form 4797–Sale of Business Property is used to record:

  • The sale of property used in your business for at least a year.
  • Involuntary conversion of property held over a year: This can be caused by natural disaster, theft, fire, etc.
  • Gains and losses on business property
  • Short-term or long term capital gain (or loss) from the sale of business property

There are a few additional (and unusual) reasons for using IRS Form 4797 – you may want to talk to your tax advisor.

 

Keep records of your business property!

As mentioned in previous blogs, it is important to keep excellent records on the purchase of all types of business property. You need to keep hard-copy records of mortgages, liabilities, and expenses associated with the purchase and maintenance of all types of property. It will help your bottom line, and you can avoid any kind of IRS audit when you file your taxes properly, with good back-up information and record keeping.

 

Need more information about business property and how it can affect the value of your business? Paris SBDC can help you understand the tax implications, and best practices for record keeping in your small business. Contact Paris SBDC today!

 

 

For additional resources regarding business property, tax implications and general guidelines for small business record keeping, please contact us at the Small Business Development Center – SBDC – Serving Paris area:  Lamar, Hunt, Hopkins, Delta, and Red River counties.

Season of Giving and Maximizing Tax Deductions

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Let’s talk taxes!

I know, don’t groan at the computer screen! There are two groups of people who like tax season: accountants and the IRS. But tax season doesn’t have to be agonizing or painful; in fact, if you start now, doing a few simple things, tax season in April will be a lot less painful and can save your small business money!

 

Profit in tax deductions:

One way to make your small business more profitable (without working harder) is to maximize your tax deductions. Fewer taxes, means more money you can put in your pocket, or back into the business. You have a lot of expenses as a business owner; did you know you can write off quite a few of them as a deduction on your taxes?

 

What tax deductions or “tax write-offs” can you use as a small business?

We’ve already talked about the CARES Act, and how to maximize your credits from the federal government, here are some deductions you’ll want to take advantage of when getting ready to file your taxes:

  • Home office deduction: If you are an employee of a bigger business, this will not apply to you. However, if you own the business or if you are a partner, you can claim your business expenses in your company’s tax return. (Yes, you may have to measure and record square footage. Do it! It’s worth the time….and crawling on the floor!)
  • Utilities: Rather at the office or at home, the utilities used while conduction a business are deductible
  • Business use of a car
  • Advertising and Promotion expenses
  • Legal and professional fees: That money you pay your tax accountant to keep you legal – you can write off each year!
  • Telephone and cell phone: the portion you use in conducting business is deductible. Just remember those calls from your mother or wife, are NOT…unless your wife is making sure you ordered the widgets for the business that she asked you to do.
  • Security and monitoring expenses
  • Internet expenses
  • Computers and programs used in your business: Quickbooks, Photoshop, McAfee, etc.
  • Business meals
  • Business travel
  • Insurance for your business
  • Bank fees
  • Employee expenses and payments to contractors
  • Education expenses
  • Interest deductions from debt
  • Shipping expenses
  • License expenses
  • Rent
  • Contributions to an IRA or other qualified retirement plan
  • Charitable contributions

 

Keep it legal!

Whether you are a small business of one, or ten or two-hundred, the rules for tax deductions are similar when it comes to small businesses. The rules DO vary slightly if you are registered as a sole proprietor, partnership, LLC, or S-Corp, so make sure you check with a qualified tax accountant on your deductions.

 

Keep records!

An IRS audit can be simple and painless, if you’ve kept good records. Most audits by the IRS, simply want you to prove your deduction. You can do that by:

  • Keeping receipts of all deductions
  • Ask for receipts from not-for-profits that you contribute to as a business
  • Keep time records
  • Keep a calendar of charitable events you sponsor or with which you are involved.
  • Have a great filing system to keep track of your deductions

 

You may think that the small donations here and there aren’t much, but they can add up. That $25 gift card to your restaurant you gave to a neighborhood 501c3?  Deductible! So are those 100 hamburger buns you donated to a local foodbank.

 

What about the holidays and the Season of Giving?

If you are a business owner, you’ve probably been asked for a donation for a charity or a charitable event. The good news is you can claim most (if not all) of your donations on your business taxes.

That community outreach program you use to help brand your business? You can deduct your donated items, meals, gift cards and even the time you spend contributing to the event. If you pay your employees to work a charitable event (that you are giving to) you can claim their wages as a charitable donation too! So, loosen those purse-strings! Not only can you feel good about donating as a business, but you can also claim a good number of those donations on your taxes.

 

 

For additional information on the what you can claim as a tax deduction on your small business taxes, (Check with your accountant) and then feel free to reach out to  us at the Small Business Development Center – SBDC – Serving Paris area:  Lamar, Hunt, Hopkins, Delta, and Red River counties.