Depreciation & Section 179 Explained

 Depreciation and Section 179 Deductions can be a challenging aspect of one's business accounting and tax return.  The regulations regarding these deductions can be complex.  Despite the complexity, general definitions and rules are provided below:

Depreciation defined

Depreciation - for assets with a useful life of greater than 1 year, an annual depreciation expense is available for each year of an asset's useful life.  Assets would include office furniture, vehicles, buildings, intangible assets, machinery, tools, etc. Each one of these assets has a recovery period (useful life) for which an expense can be taken.  Below are examples of various assets and their recovery periods per the IRS:

Office furniture                     7 years

Automobiles                          5 years

Appliances                             5 years

Residential Rental Prop     27.5 years

Computers                             5 years

Normally, these assets would be depreciated over its recovery period.  For example, an appliance costing $2000 and depreciated over 5 years would experience a $400 deduction each year for 5 years.

Section 179 defined

Section 179 deduction -  refers to expensing an asset on one's tax return in its first year (deducting its entire cost) rather than depreciating it over its useful life.  The IRS provides guidelines on when this is permissible and what the limitations are.  You can find information on Section 179 and other depreciation information  here.  

The use of 179 deduction for an asset in its first year is illustrated below in a simple example to reflect tax savings:

Purchase of asset:

Office computer                 $5000   (Purchased 1/1)

First year depreciation        1000     (5 year property)

179 Deduction                    5000

The 179 Deduction provides tax savings of:     5000

                                                                              .22   (tax bracket)

                                                                          1100    Tax savings

For businesses with frequent turnover of assets, a strategy of when to use Section 179 with asset purchases and when not to use it can provide optimal tax savings over the long term.  However, a point should be made regarding 179 deduction:   if an asset has been expensed using Section 179 and it is disposed (sold, donated to a charity, given away, etc) before its useful life has passed (example:  a computer disposed of before 5 years when it had been expensed by 179), the item is subject to depreciation recapture. This means the item needs to recapture the depreciation taken before it would have been fully depreciated had it not been expensed with 179.  The recaptured depreciation is added back on one's tax return in the year of disposal.

Handling depreciation expense for a business can be challenging.  Let LFC help your business work with you in determining a strategy for your fixed assets.  Use the Contact Us or Set Appointment feature on this blog to schedule a time.

 

Accounts Receivable & Accounts Payable in Quickbooks

 Accounts Receivable and Accounts Payable are processes in an accounting system to handle 2 important functions that aid in the production of financial statements for a business or organization.  Each process is explained below:

1.  Accounts Receivable

Accounts Receivable is part of the income side of a business.  Invoices are produced to record sales of products or services purchased by one's customers.  Invoices keep track of who purchased items as well as what was purchased.  They are vital in maintaining sales of inventory (if a business sells inventoried items) and Cost of Goods Sold for the financial statements (when items invoiced and sold).  

When a business provides terms to its customers (allow customer to pay over time - ex: Net 30 days), the invoice/accounts receivable system helps monitor when customers have paid and how much, which helps in knowing if invoices have been fully paid.  

Accounts Receivable system also helps businesses  monitor which customers are good customers who pay their invoices consistently, or which customers are not paying their invoices promptly (and ones not to extend additional credit).  

2.  Accounts Payable

Accounts Payable is part of the expense or asset purchases system of a business.  Bills from vendors are entered into accounts payable to record purchases of inventory items, various expenses (ex: utilities) or assets like machinery and equipment. Checks are cut or electronic transfers are made as payments for the bills to satisfy one's obligation to the vendors.  Accounts Payable provides the system to monitor bill payments to help with cashflow by determining when bills should be paid.  

Quickbooks software can help manage Accounts Receivable and Accounts Payable for businesses.  It will handle even the more sophisticated systems that involve electronic payments and online processing. It will ensure data is reporting correctly on the financial statements and one's customer and vendor records are maintained properly.

Year-end tax planning - scheduling appointments with accountant

 Now is a good time to begin year-end tax planning.  As we move into the 4th quarter of 2026, it makes sense to review income and expenses along with making the necessary projections of income and expenses to determine the year's tax liability.

A series of appointments before the end of the year with one's accountant is vital to stay on top of one's tax situation.  This is extremely important if one owns and operates a business, particularly one that may have inconsistent revenue. It is also important if one's financial situation has changed dramatically for previous years.  This would include the receipt of retirement distributions, lump sum received from social security, an inheritance, etc.  Perhaps one's personal situation has changed (i.e. newly married, death of spouse, divorce, newborn child or adoption, etc). Thus, these changes warrant an analysis before year-end.

It is also important to keep in mind that as of this writing, there are 2 quarters remaining in 2026 to make estimated tax payments.  These opportunities are available if it is necessary for one to make estimated payments in order to pay the proper amount of tax into the government.   LFC can help with year-end planning and tax payment calculations.  Use the Contact Us and Set Appointments features on this blog to contact the office.

Records Retention

The IRS publishes guidelines on how long to keep accounting records.  These are records such as income, deductions, or credits taken on a tax return.  The IRS defines a period of time ('period of limitations') for holding records as the time for which one can amend a return or the IRS can impose more taxes on the taxpayer.

The time periods for income tax returns include:

• 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later, if you file a claim for a credit or refund after you file your return.
• 7 years if you file a claim for a loss from a worthless securities or bad debt deduction.
• 6 years if you did not report income you should have reported, and it is more than 25% of the gross income shown on a return.
• Keep records indefinitely if you did not file a return.
• Keep records indefinitely if you filed a fraudulent return.

There are other things to consider based on the nature of the records:

• Property records - keep until year property is disposed. 
• Healthcare insurance - if you claimed the premium tax credit, keep records for as long as you received advanced credit payments through the Health Insurance Marketplace and premiums paid. 
• Business records - if you have employees, employment tax records should be kept for 4 years after the tax becomes due or is paid, whichever is later.

You will find IRS information here and here for clarification.

Quickbooks Payroll

Within the Quickbooks Online or Desktop software is a payroll feature that provides quality payroll processing services.  This feature can be a cost-effective alternative to 3rd party processors.

Quickbooks Payroll allows small business owners to:

• Produce payroll checks at any frequency (weekly, bi-weekly, or monthly)
• Submit direct deposit
• Make payroll tax payments
• File quarterly 941 reports
• File state quarterly reports 
• Accommodate any other payroll tax liability (garnishments, retirement contributions, etc)

Quickbooks payroll will also handle the W2s at year-end.

Quickbooks Online software has the feature as part of the online accounting software.  Once it is turned on, one can begin processing payroll after set-up.  Quickbooks Online also has a stand-alone online version of payroll.  If a business needs payroll, but not the full accounting package, Quickbooks online payroll will accommodate these busiensses.

The payroll tool from Quickbooks is a  hands-on feature.  Business owners are in control of their processing. 

LFC can help businesses with their payroll needs.  Contact the LFC office from the Contact Us feature on this blog or set up an appointment.