Small business owners need all the tax help which is available. Tax deductions allow small business owners to keep more of what they earn. With a 35% marginal tax rate, the government is a silent partner who takes no risk and over one-third of the profits. Tax deductions are neither simple, straight forward, or intuitive. However, the effort to increase tax deductions is well worth the effort. Tax deductions reduce taxable income for small business owners but do not directly reduce federal income taxes. Both cash and non-cash tax deductions merit review.

Cash disbursements can be expensed or depreciated. Due to the judgment required to determine what should be capitalized, there is some discretion. For example, a local gang paints graffiti on a portion of the side of your building. You decide to repaint the entire side of the building instead of just the portion with graffiti. Is this a repair or should it be capitalized? Some owners would elect to expense repainting the entire building. Business owners should seek counsel from their advisor regarding discretionary tax deductions.

Real estate provides bountiful tax deductions for small business owners. Most real estate owners inadvertently understate depreciation and thus forego available tax deductions. The common practice is to simply separate land and long-life property. Real estate owners can typically increase depreciation by 50-100% in the first 5-7 years of ownership by utilizing cost segregation. Cost segregation can separate up to 130 items that can be depreciated over 5, 7, or 15 years. These short-life items typically comprise about 20-40% of the improvement cost basis. The increased depreciation increases tax deductions.

After a cost segregation study is prepared, the owner can “catch-up” previously under-reported depreciation. Another source of “hidden” tax deductions is a careful review of your fixed asset schedule. Many fixed asset schedule include items which should have been expensed or which have been discarded. Misclassified items are another source of additional tax deduction. In some cases the depreciation life for an asset has been overstated through clerical error. A fixed asset audit typically generates meaningful tax deductions.