As promised, here is part two of our interview with Certified Public Accountant Tanya Ouellette. In this post, you’ll learn how seeking the help of an accountant can help you save on your tax return, and discover what options are available to you if you don’t qualify for Section 179!
How would an accounting firm like Raiche & Associates help business navigate Section 179? What is that process like?
Typically we will meet with a new client and take a look at what they had in the prior year on their tax returns. And if it’s a company that’s capital-intensive or has a lot of assets, then we would probably want to take a look at their depreciation schedule.
There are often times when we get clients in and say, ‘Your prior accountant didn’t take any accelerated depreciation. I’m not sure why…’ And it might be something you talk to the client about and the client says, ‘Well, I didn’t want them to’ or ‘I’d rather have it over the five years because I think my business is going to grow so my net income will be higher down the road and I’ll need it more then than I do now…’
We have those conversations with our client because if our client is in a low tax bracket (started a new business), we probably don’t want to utilize that Section 179 yet.
It wouldn’t be worth it for them?
No, because they would be paying a lower tax rate. The less money you make the lower tax rate you pay, so if they’re in the 15% tax bracket we don’t want to use it. We’d rather push it off and use it in other years.
So, if you are in a high tax bracket and every single year the business needs new equipment, they can use Section 179 more than once?
Yes, up to that limit for that one year.
Can you explain what accelerated depreciation is?
Accelerated means you take more at the beginning. We call it accelerated depreciation when you take either Section 179 or bonus.
Bonus depreciation means you can take up to 50% in the first year. And that’s limited to a different dollar amount [than Section 179].
What would be the benefit of taking Bonus Depreciation as opposed to Section 179?
If businesses have hit the limit of Section 179 or if you are expecting your business to increase so maybe you just do the bonus, which is 50% of the asset.
When you say expecting your business to increase, what do you mean?
Grow in the future. Let’s say you started a coffee shop in Portsmouth. You’re probably not going to do that well [in your first year]. You might even have a loss because of all the money you are putting in to the business. If you are still ramping up a business, we don’t want to utilize Section 179. We want to save depreciation for the later years. Take 1/5 this year and save the rest for other years.
For bonus, is that something you lean people towards if they aren’t able to Section 179?
Yes, most businesses will take bonus if not 179. And there’s a service out there that people provide called cost-segregation. Let’s say you buy a hotel for $9 million. How do you allocate that between what you purchased, because you purchased land, you purchased furniture, you purchased a pool? That’s a good way to take advantage of the 179.
Once you have that cost-segregation done, you can take your five years and 179 those, and your 15 years, etc. But you can’t take the building and do that because if you just said, ‘I bought a hotel for $9 million dollars’ you’re going to have to take that over 39 years. If they purchase a new business, they should probably have a cost-segregation done.
What else is important to know about Section 179?
It’s pretty straightforward – you just get to expense that equipment in the first year you bought it.
Something else to note is that if it’s not new to you, you are unable to take Section 179.
This means that if you already have equipment you purchased from previous years, you cannot utilize 179. However, you can utilize it if you buy used equipment that is new to your business.
About Tanya and Raiche & Associates
Tanya Ouellette joined Raiche last October. Prior to Raiche & Associates, she worked at a couple other small firms on the Seacoast for five years and for eight years before that she worked at a firm in Boston. She grew up in New Hampshire, on Lake Winnipesauke, and went to UNH. From there, she fell in love with the Seacoast. She graduated from UNH with a degree in Business Administration and has a Masters in Tax from Bentley College.
Raiche & Associates is your typical advisory tax and accounting firm. They provide businesses with tax compliance, but more importantly, the advisory piece – doing the tax planning at the end of the year is where they add their value. They are the CPAs that help to advise business owners and individuals. They have two office locations in Rochester and Dover, New Hampshire.