You: But the title­—

Sorry, but that refers to rental properties you own.

You: Now how could I possibly own the property if I am renting it?

If you’re the landlord.

You: I knew that.

There are many tax benefits available to those who own rental properties.  As an important example, most modifications you make to your rental property result in tax savings of one kind or another.

You: How so?

It depends.

You: On?

Whether the changes you make to the property are considered improvements or repairs.  Whereas repairs may be immediately tax deductible, improvements must be depreciated over time.

You: What’s the difference?

What’s the difference between improvements and repairs? Or what’s the difference between an immediate tax deduction and depreciation over time?

You: Actually, both.

Fair enough.

Home Improvements

Improvements vs. Repairs

Like they sound, repairs don’t make any permanent changes to the property; they simply put the property back to a previous state.  Said another way, repairs don’t add to the value of the rental property.  Consequently, expenses such as the cost for a plumber to go fix a toilet or for an electrician to replace a circuit are textbook examples of repairs.  But, so too, are far more expensive costs, like the expense of painting your property or fixing up part of a roof where it might be leaking (again).

On the other hand, expenses you incur which increase the life of the property or add value to it are considered improvements.   Replacing the whole roof, for example, is an improvement. Although you wouldn’t necessarily think of a new roof as immediately increasing the value of the property, it certainly increases the expected useful life of it and consequently is considered an improvement.  Obviously, additions and similar major upgrades are considered improvements as well.

Tax Deduction vs. Depreciation

Repair expenses may be immediately tax deductible from rental income. This means you’ll reduce your taxable income from the rent you collect by the exact amount of the repair expense.  On the other hand, costs for improvements must be depreciated or divided over their useful life.  As a result, improvements add to the amount you can already depreciate related to your rental property on an annual basis.

You: What does that mean?

Say you decide to add a new piece of furniture to the property. Furniture typically has a five-year life, at least according to the IRS (that you and your tenants might have completely different opinions is not relevant).   If the price of the furniture is $500, you can depreciate $100 a year for five years.  Since a couch is not a repair, you cannot immediately expense it.

Between improvements and repairs, there’s plenty of tax savings opportunities if you’re in the mood to get to work (and to spending) this summer.

Business Travel

If you are aware of any conferences, trade shows, other events, or searching for a job in line with your industry, you probably understand that these trips can be deductible. So, why not combine a business-related trip with pleasure? That’s right, if you have an annual industry conference on the other side of the country, you could plan your trip carefully so that not only do you get to attend the conference, but also make a family vacation out of it. This doesn’t mean the family can tag along tax-free, but here’s how it works.

You can deduct expenses that are “ordinary” and “necessary” for your trade, business or profession. It doesn’t matter if you’re a salaried W-2 employee or self-employed. If attending an event is considered ordinary and necessary for your line of work, you’ll qualify for a deduction. For example, if you’re in the business of selling widgets and there’s an annual widget expo that highlights all the upcoming widgets, attending this event would be considered ordinary and necessary for your line of work and the costs incurred to attend the event could be deductible.

Now, say this is an expo in Florida and you just happened to be considering taking the family on a vacation this summer. If you planned on attending the expo anyway, why not take the family along and spend time together in Florida? You get to attend the event, your family gets to spend time in Florida, and you’re eligible for some tax deductions.

What You Can Deduct

Attending and traveling to events like these come with many possible deductions. For starters, you can deduct the registration fees and any materials required to attend. If you need to travel, you can deduct associated costs to get you to the event. This includes round-trip airfare, car rental, mileage when using your own vehicle, public transportation, and so on. In addition, you’re allowed to deduct lodging expenses. Finally, you will be able to deduct meals, but as you may know, business meals are only 50 percent deductible.

What You Can’t Deduct

If you’re taking the family along, unfortunately their individual expenses cannot be deducted. That means if your family of four is flying, you can only deduct your personal airfare. And if you take the family to do things not related to the event you’re there to attend, those obviously cannot be deducted. Finally, you also cannot deduct expenses incurred for things that occur beyond the event schedule. If you’re attending a three day conference but stay an entire week with your family, you can’t deduct the other four days of lodging, meals, etc.

But one thing that can be a benefit is lodging. Most of the time a hotel room rate will be the same whether it’s just you staying in it or if you’ve got your entire family staying there, so in effect you could be getting a tax break while your entire family stays with you.

Planning and Record Keeping

As you can see, it is possible to turn a business trip into a family vacation that could yield some nice tax breaks while getting your family out of the house. The key is careful planning and record keeping. You’ll first want to make sure the event you’re interested in would qualify as ordinary and necessary for your line of work, and then if so, work to structure the travel so that you can maximize your time and possibly make a nice little trip out of it.

Then, as always, keep good records. Make sure you keep all receipts, log mileage, save copies of event materials, and so on.  And don’t forget to separate the expenses required for the conference or event from the non-deductible family expenses so that you’re not double-dipping. But if done right, you can get ahead professionally and enjoy some tax breaks while bringing the family along for a little leisure time away from home.

Overlooked Deductions

1. Moving Expenses for a Job

With unemployment still high, a lot of people have needed to go the extra mile, literally, to find work. What many people don’t realize is that moving expenses related to relocating for a job may be deductible. To qualify, you need to move at least fifty miles away from your old home, and you’ll need to work at your new job for at least 39 weeks after the move.

If you qualify based on the information above, you’ll then be able to deduct transportation and storage expenses. This may include hiring movers, renting moving trucks, storage units, tolls, parking, and so on. In addition, you may even be able to deduct lodging if the move is long and takes a few days to reach your destination.

2. State Sales Tax

The money you pay in state sales tax is a potential deduction, but it isn’t always worth taking. Those who can benefit most from this deduction are people who live in states that don’t have a state income tax. Every taxpayer has the option to choose between deducting state and local income taxes, or state and local sales taxes. Obviously, if you aren’t assessed a state income tax but still pay a sales tax, deducting the sales tax will almost certainly provide the greater benefit.

There are tables that give you deduction amounts based on income levels, but keep in mind that big purchases like cars, boats, and recreational vehicles count as well. So, be sure to keep good records of larger purchases which will help you determine if taking the state sales tax deduction is a better option.

3. The Earned Income Tax Credit

While nobody wants to find themselves in a low income situation, those who do have a nice tax credit available to them that often goes overlooked. The average earned income tax credit, or EITC, is around $2,000. Since this is a credit and not a deduction, that’s essentially like putting $2,000 into your pocket. And you don’t have to be strictly low income to qualify, because just losing a job halfway through the year could bring your income down enough to qualify.

Section 179 Expenses

One of the toughest obstacles for any new business is finding the capital required to make the appropriate investments your enterprise needs to position itself for the long-term – and to get to the point where it finally becomes profitable.

In the case of certain major expense outlays, Uncle Sam can help through what is known as a Section 179 election.  Typically, major expenses such as machinery and equipment are required to be depreciated over a term of years dictated by the IRS to approximate the useful life of the purchase.

If your small business spends $7,000 on equipment the IRS considers to be 7-year property, you can take a $1.000 ($7,000 cost divided by 7 years) depreciation deduction each year for seven years. If the business is in the 25% tax bracket, the depreciation deduction saves $250 in taxes annually.

However, certain expenses qualify for the Section 179 expense election.  If so, the business can choose (or, in IRS-speak, “elect”) to immediately expense (rather than depreciate) the purchase. Consequently, the entire $7,000 purchase could be written off this year. For a taxpayer in the 25% tax bracket, the immediate tax savings generated by the Section 179 election are $1,750.

What Purchases Qualify for Section 179 Expensing?

For the vast majority of small businesses, the key Section 179 opportunity areas are tangible (i.e., you can see it, you can touch it) personal property. Examples include not only machinery and equipment but also office equipment, including furniture, and off-the-shelf software.

When Can You Elect to Take the Section 179 Deduction?

You are eligible to take the Section 179 expense for the tax year in which you first put the item(s) purchased in service. Said another way, you can choose to take the Section 179 election when you file your tax return (Form 4562) for the year in which you purchased (not received via a gift) an item which you began to use in your business.

Are There Any Limits to the Section 179 Deduction?

The following limits to the Section 179 deduction apply:

• Dollar Maximum
• Business Income
• Percentage Use

Section 179 Maximum Dollar Limit

The maximum dollar amount you can expense via Section 179 varies by tax year and is currently $500,000.  Regardless of the amount you buy and put into service during 2011, you can’t expense more than the 2011 limit of $500,000. Furthermore, if you invest more than $2,000,000, you won’t be able to expense anything over that amount via Section 179.

The larger Section 179 tax benefit is set to expire on December 31st, 2011 and will be reduced to a $125,000 dollar limit and a $500,000 investment limit beginning tax year 2012. So if you have been debating about buying that computer equipment, you may want to go make that purchase today!

Section 179 Business Income Limit

The amount of your Section 179 expense election is further limited to the amount of net income (profit) you have from your businesses. So if using all of your Section 179 expenses would put your company in a loss position, you can only elect to expense an amount equal to what it would take to make your businesses break-even. Any unused Section 179 amount can be carried forward indefinitely and used to offset future year’s business income.

Section 179 Percentage Use Limit

Certain types of equipment, most notably computers used in home offices, are used partially for business purposes and partially for personal benefit.   Provided you use the item at least 50% for business, you can still take the Section 179 expense. However, the amount of the Section 179 expense election is limited to the percentage of time the item is used for business.  So if your new $1,000 laptop is used 75% for business and 25% for video games and looking at the weather in Ann Arbor, Michigan, you can expense $750.

Make sure you take the time to keep good records throughout the year. You’re sure to enjoy the tax savings, helping keep your business on the right track and don’t forget, TurboTax easily guides you through Section 179 deductions.