With the recent changes in federal income tax laws (and changes in withholding in many states), as well as modifications to the depreciation schedules for purchased assets, it’s more important than ever to make certain the information you use to calculate federal and state withholding taxes and the system you use to calculate the depreciation on new and used purchased depreciable assets is up-to-date and accurate.

Ken Hilton

Let’s first take a look at federal income tax withholding and some of the things that make it important to ensure these calculations are correct.

I’ve heard some people make the comment that “It’s not a big deal if calculating withholding on employee pay isn’t accurate because it will all work out at the end of the year when the employee files their tax return; therefore, it’s all right if we just use last year’s tables. They’re close enough.” While it might be true it all works out in the end, think about what it means to your valuable employees.

If you withhold too much in federal and state taxes on every paycheck throughout the year, the employee may get a big refund check, but they missed the opportunity to use that money during the year for much-needed expenses or to invest it in something that would have made them a return on their money. This could have been a significant amount in 2017, as even a relatively safe investment returned over 20 percent.

Conversely, what if you under-withhold federal or state taxes every pay period of the year? The employee now ends up with a larger amount of taxes due when they file their return. Money they may not have ready access to. Not only does this put them in an uncomfortable position, but there may be penalties and interest due because of not paying their taxes due in a timely manner.

In either case, this does not make for happy employees. Keeping the tables that are used to calculate withholding taxes up-to-date can save money and headaches.

Next, let’s look at issues that could cause problems by not using current depreciation schedules. Many, if not most, companies rely on an accounting service to maintain their depreciation schedules for new and used purchased assets.

You can usually count on these services to make sure the methods they use are up-to-date, but it still doesn’t hurt to have an understanding of some of the consequences if the wrong calculations are used or of not taking advantage of the changes in Section 179 and Special Depreciation Allowances and accelerated depreciation.

For tax purposes, the recent changes in the tax code allow for a larger amount of depreciation to be taken in the first year an asset is purchased. You may be able to deduct a more significant amount of new purchases against your income than in previous years. This will likely result in lower taxes due, which obviously adds to the bottom line on a tax basis.

Keep in mind tax depreciation is not a good measure to use for calculating accrual profit/loss of an operation. It is important for an accurate and meaningful analysis, and especially for trend analysis over several years, to use a management depreciation schedule. Management depreciation will typically spread the cost of an asset over its useful life.

Some businesses like to spread this value evenly over the expected life of the asset, while others might use a declining balance over several years, taking more depreciation in the early years and less later in the asset’s life. I heard from a company that liked to use a 15 percent declining balance calculation for all of the assets they purchased.

They also had an appraiser come to their operation each year to determine the current value of their major assets, and they found the method they used matched the actual value of the assets very closely. While this method works well for this particular company, each operation is different and should determine what works best for them.

So even though the calculations of federal and state withholding and the methods used for depreciating assets may seem like they don’t change significantly from year to year, you can see how using the latest information can make a big difference to your bottom line.