The end of the year is a good time to consider making a tax entity change. If you’re thinking of switching, talk to your Padgett Representative first to find out if changing makes sense for your business, given the potential tax consequences. Some changes have few or no tax implications, but others can be costly. It is very important to consider the tax consequences of making the change.
Incorporating a sole proprietorship or partnership should be tax free if done correctly, but failure to adhere to the rules can trigger tax. Get good advice before making a move and then follow the advice carefully.
Another year end decision includes equipment deductions.
It generally makes sense to write off eligible equipment using the Section 179 expense option in the year of purchase. You’ll get the tax deduction faster than if you took depreciation over time. However, expensing may not make sense if you’re in a low tax bracket in the year of purchase but expect to be in a higher bracket in future years, or if your new sole proprietorship is not making enough to trigger self-employment tax.
While the depreciation deductions may be spread out over time, if you’re in a higher tax bracket or paying self-employment tax, the deductions will be worth more. You’ll have to crunch the numbers and consider the time-value of money to be sure. Keep in mind that you don’t have to write off the entire asset. If a machine cost $5,000, you can claim the Section 179 expense option on $2,000 and take regular depreciation over time on the remainder.