Q: As I move my business forward into 2003, I want to be certain that I include the new tax laws as part of my business planning. Are there any new deductions and/or credits that I should consider?
A: Yes. 2003 tax law offers a number of changes that may be useful to you in planning to save on your business's tax bill. Most of the changes are designed to either increase your deductions or offer a tax credit against the preliminary calculation of your business's 2003 tax due. The following are highlights of the changes in business tax law for 2003:
Maximum annual limit on Section 179 deduction: The maximum deduction that can be taken under Section 179 has been increased from $24,000 in 2002 to $25,000 for 2003. Under Section 179, your business may deduct up to $25,000 of the cost of any business equipment, furniture and fixtures that are both purchased and placed into service in your business during that same tax year.
Health insurance deduction for self-employed individuals: The percentage of health insurance premiums that is deductible to self-employed individuals has increased from 70 percent in 2002 to 100 percent for 2003 and thereafter.
Special 30 percent depreciation allowance: A special 30 percent depreciation allowance is available for new property acquired and placed into service after September 10, 2001. The 30 percent depreciation allowance is figured on the adjusted basis after taking any Section 179 deduction. The adjusted basis is then reduced by the 30 percent depreciation allowance before calculating the regular depreciation deduction for the first tax year and all subsequent tax years.
Automobile deductions: Although the standard mileage rate for business driving has been reduced from 36.5 cents in 2002 to 36 cents for 2003, there is good news in that the luxury tax on new cars (which used to be 3 percent on the cost above $40,000) has been eliminated.
Employer-established "deemed IRAs": Employers can now set up separate retirement accounts or annuities for their employees. These accounts will be treated as IRAs (deemed IRAs) rather than part of a qualified retirement plan. This will allow employees to make voluntary contributions via payroll deductions into traditional or Roth IRAs.
Tax credit for employer-provided child-care expenses: There is now a tax credit available to employers who provide child care for their employees. The credit equals the sum of 25 percent of the qualified child-care expenditures plus 10 percent of the qualified child-care resource and referral expenditures. The maximum annual credit per employer is $150,000.
The family-owned business (estate tax) deduction is repealed for decedents who die after December 31, 2003: This gives way to an increase in the estate tax exemption to $1.5 million, which is greater than the combined family-owned business deduction plus the unified credit amount allowed (totaling $1.3 million for years prior to 2004).
Frequent flier miles now (officially) exempt from tax: In the past, the IRS has not taxed frequent flier miles earned on business trips and used by employees for personal travel. According to tax law, there was always the possibility that they would impose a tax upon review at a subsequent audit. Effective immediately, the IRS will no longer attempt to tax these miles.
As always, you are well-advised to implement your tax strategies based only on those business decisions that would otherwise favor your business and not solely on their potential for tax savings.
Note: The information in this column is provided by the author, not Entrepreneur.com. All answers are general in nature, not legal advice and not warranted or guaranteed. Readers are cautioned not to rely on this information. Because laws change over time and in different jurisdictions, it is imperative that you consult an attorney in your area regarding legal matters and an accountant regarding tax matters.
David Meier received an MBA in Finance from Loyola of Baltimore, and spent much of the 1970s teaching business courses; later, he created a consulting group, and for the next two decades, provided accounting and tax services to small-business owners. He is currently the founder and COO of Business Development Coaching, which provides small-business owners with ongoing business coaching and the knowledge and support required to enable them to become truly successful entrepreneurs. Visit his site at www.makeyourlifetaxdeductible.com.