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Reducing taxable income: How and when can I do it?

Taxable income

As the end of the year approaches, you likely are more mindful of how your business spending will affect your business's taxable income for the year. And in the case of some spending, how it will affect future years' taxable income. To understand what effect spending will have on the taxes you'll pay, it's important to recognize the differences between deductible expenses and capital expenditures.

Deductible (current) expenses

These are the everyday costs of your business. Deductible expenses are subtracted from your business' gross income in the year they were incurred. These purchases tend to be used for less than one year.

Generally, current expenses are preferred to capital expenses because you receive the tax deduction that same year, leaving more cash on hand.

You may be able to deduct the full amount of a business expense if it's ordinary and necessary and it's not a capital expense. Below are a few examples of deductible expenses:

  • Repairs made to fleet vehicles (reconditions or overhauls don't apply)
  • Daily maintenance of a driveway or private road
  • Tools with life expectancy of less than a year or of minor cost
  • Building rent
  • Electricity, telephone bills
  • Advertising expenses
  • Legal fees
  • Travel expenses

Capital expenditures

These are purchases that are considered investments and will continue to be assets for your business over several years. Similarly, the deduction you receive will be spread across a number of years through amortization, depreciation or depletion. Below are a few examples of capital expenditures:

  • Business vehicle purchases, reconditions and overhauls
  • Property construction, remodel or purchase
  • Computer and computer components
  • Software
  • Patents
  • Copyrights

Writing off capital expenditures in one year

If you own a small business, you could be eligible for a section 179 deduction. This allows certain eligible capital property totaling no more than $25,000 to be treated as a deductible expense rather than a capital expenditure. While assets such as real estate and inventory for resale are not eligible, businesses without much on-hand cash may benefit greatly from section 179 tax deductions.

Taking advantage of every deductible expense and capital expenditure could save your business money. While deductible expenses are more immediate, be careful not to downplay the wealth of yearly tax deductions you could receive from the large investments you make in your business. For more useful tips for keeping your business running smoothly, visit California Bank & Trust's Business Resource Center.

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The information contained herein may not represent the views and opinions of California Bank & Trust, a division of ZB, N.A. or its affiliates. It is presented for general informational purposes only and does not constitute tax, legal or business advice.
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