On May 28, 2003, President Bush signed into law the Jobs and Growth Tax Relief Reconciliation Act of 2003. While media attention has been focused on the law's dramatic reduction of the tax rates payable on corporate dividends (more on that below), several provisions in the new law are designed to help small businesses, their owners and investors. Here are the highlights:
Expensing your equipment purchases. Section 179 of the tax code allows business owners to expense, rather than depreciate, their purchases of tangible personal property up to a certain dollar amount. In an effort to spur businesses to invest more in equipment and other qualifying goods, the new tax law increases the ceiling from $25,000 to $100,000 for tax years beginning after 2002 and before 2006. Thus, if you're a calendar year taxpayer, the higher limit applies to 2003, 2004 and 2005.
Under the old law, the amount that could be expensed is reduced by the amount by which the cost of equipment installed during a taxable year exceeds $200,000. The new law increases the limit to $400,000. Thus, if you install $425,000 worth of equipment during a taxable year, the amount you can expense is $75,000 ($100,000 less $25,000).
The new law also clarifies that off-the-shelf or "shrinkwrap" software will now qualify for the expense option.
Depreciating your equipment and leasehold improvement purchases. If you purchase brand new equipment with a recovery period of 20 years or less (such as cars, computers and construction equipment), or if you lease your store or office and want to make leasehold improvements this year, the new law allows you to take a 50 percent writeoff (increased from 30 percent) called "bonus depreciation" in the first year. So, if you purchase $50,000 in new trade fixtures after May 6, 2003, you can write off $25,000 on your 2003 tax return, and depreciate the remaining $25,000 using the regular depreciation rules (for leasehold improvements, the recovery period may be as long as 39 years). For passenger automobiles, the bonus depreciation amount is increased from $4,600 to $7,650.
Not all leasehold improvements qualify, however, because some improvements--such as carpeting and movable partitions--are considered "tangible personal property" subject to other depreciation rules. Also, the 50 percent bonus depreciation doesn't apply to property purchased after May 5, 2003 if there was a written binding contract for the purchase of the property in effect before May 6, 2003. So if you ordered new trade fixtures in March that weren't installed until June, the old 30 percent bonus depreciation applies to your purchase.
You must take the 50 percent writeoff unless you elect out of bonus depreciation. Electing out may make sense if taking a big writeoff for equipment purchases this year will put you in a higher tax bracket next year because you're left with a much lower depreciation deduction. Your accountant can help you figure this out.
Dividend rate cut. In an effort to reduce the potential double taxation of corporate dividends, qualifying dividends will now be taxed as a net capital gain and at new rates--15 percent for taxpayers in the 25 percent and higher brackets and 5 percent for those in the 10 percent and 15 percent brackets. The reduced rates apply to dividends received from January 1, 2003 through December 31, 2008.
Since corporations are still not allowed to deduct dividends (as they can employee salaries or interest on corporate debt), it's unlikely that the dividend tax rate reduction will have a dramatic impact on small business corporations.
So what's your next step? This is only an executive summary of the new tax bill, and as with any other matter dealing with tax law, the Devil is in the details. The entire text of the new law can be downloaded free of charge from the U.S. Government Printing Office's Web site at www.gpoaccess.gov, while plain English summaries can be found at www.irs.gov, www.natptax.com and www.smbiz.com. As always, you should consult with your accountant before making any decision based on the recent tax law changes.
Cliff Ennico is host of the PBS TV series MoneyHuntand a leading expert on managing growing companies. His advice for small businesses regularly appears on the "Protecting Your Business" channel on Small Business Television Network. E-mail him at firstname.lastname@example.org. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. Copyright 2003 Clifford R. Ennico. Distributed by Creators Syndicate Inc.