Entrepreneurs will enjoy some savory business tax savings as a result of the recently enacted Jobs and Growth Tax Relief Reconciliation Act of 2003. "The most lucrative piece of the new law [for entrepreneurs] is a huge increase in the Section 179 first-year depreciation allowance for qualifying property," says Mallory Collier, tax manager for accounting firm Jackson, Rolfes, Spurgeon & Co. in Cincinnati. Under this tax break, entrepreneurs can immediately deduct 100 percent of the cost of most new and used business equipment instead of depreciating it over several years.
Under prior law, the allowance was limited to $25,000. Now the annual Section 179 allowance for taxable years beginning in 2003, 2004 and 2005 quadruples to $100,000. Keep in mind that the Section 179 allowance is phased out on a dollar-for-dollar basis when qualifying assets costing over $400,000 are placed in service. For example, if a company adds $430,000 of equipment during 2003, its Section 179 allowance is cut back to $70,000 ($100,000 minus $30,000 excess).
In addition, the 2003 act makes the temporary bonus depreciation enacted last year even better, says Collier. "For example, 50 percent of the cost of qualifying new assets purchased and placed in service on or after May 6 of this year through the end of 2004 can be written off as depreciation in the first year. [No bonus depreciation will be available after 2004 unless Congress takes further action.] The remaining half is then written off over the years under the usual depreciation guidelines." (The bonus depreciation refers to equipment assets as well as other assets that have a useful life of 20 years or less.)
Combining bonus depreciation with increased expensing can generate significant tax savings. To achieve the maximum benefit, Collier advises expensing purchases of used assets, while saving bonus depreciation for purchases of new assets. Why? Section 179 applies to both new and used assets, while the 50 percent bonus depreciation applies to new assets only. "In both cases, assets with longer depreciable lives generally should be selected first," she adds.
Don't neglect to look into the tax breaks available for buying certain new or used "heavy" SUVs, pickups and vans used more than 50 percent for business. They qualify under the $100,000 Section 179 allowance. Another big plus for business owners who operate as sole proprietors, partnerships or S corporations is the fact that they will directly benefit from the new law's reduction in marginal tax rates.
These recent changes offer important tax benefits. But, says Collier, "since as of now they are only temporary provisions, businesses need to plan soon to take full advantage of them."
Great Falls, Virginia, writer Joan Szabo has reported on tax issues for 16 years.