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Maximizing Depreciation for the Best Tax Position

Maximizing Depreciation for the Best Tax Position

When it comes to maximizing depreciation deductions before the end of the year, timing is critical. It's important to start thinking about this well before mid-December, as it can take several weeks to get new equipment into your business. This is especially important to consider post-pandemic, where delays in acquiring equipment are common. 

Timing is Everything

Depreciation deductions can only be claimed for assets that are in service and actively doing their job by the end of the year or within the first three months of the following year. If you don't give yourself enough time, you may lose out on valuable deductions.  

Buy Equipment for the Right Reasons

It's essential to make good business decisions when purchasing new equipment and not solely focus on tax benefits. Buying equipment just to avoid paying taxes is not a sound business strategy. It's important to consider what you need and how it will benefit your business.  

If you don't have enough cash to purchase equipment taking out a loan may seem like a good idea. It's important to remember that loan payments are not tax-deductible. Instead, deductions can only be claimed for the asset itself. Taking a large deduction this year may lead to financial strain in the following years when you must make loan payments with after-tax money.  

Depreciation in the Big PIcture

It's crucial to consider the long-term implications of your decisions. For example, if you take a large deduction this year and end up in a higher tax bracket next year, you may have missed out on significant tax savings. It's important to evaluate the overall tax landscape and make sound decisions based on your business's goals. 

Plan Acquisitions to Maximize Deductions

If you're considering a business acquisition, timing is key. Acquisitions often involve the purchase of depreciable assets, and the allocation of the purchase price between tangible assets and goodwill can impact your tax deductions. Planning the timing of the acquisition and finalizing it by the end of the year can help maximize your deductions.  

Take a Strategic Approach

Maximizing depreciation deductions requires careful planning and consideration of your business's specific needs and circumstances. It's important to make good business decisions and not focus solely on tax benefits. Timing is crucial, and it's essential to evaluate the long-term implications of your decisions. By taking a strategic approach, you can maximize your deductions and optimize your tax position. 

Do you want to make the most out of your deductions? Kaizen CPAs + Advisors can create a plan to set you up for success. Click the “Let’s Chat” button and see how we can help you. 

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