New Business Tax Breaks Offer Big Advantages

Owning a business — whether it is incorporated or not — has several advantages from a tax perspective. And the tax law enacted earlier this year has added to those advantages.

Under the Jobs and Growth Tax Relief Reconciliation Act of 2003, businesses are given additional incentives to invest in new equipment and other depreciable assets. The new law:

Provides businesses with an annual write-off of as much as $100,000 (up from $25,000) of the cost of qualifying assets, rather than requiring those assets to be depreciated over time.

Expands and modifies the bonus first-year depreciation rules. Now, 50% of the cost of qualifying new assets can be claimed as additional depreciation in the year the assets are placed in service.

The two provisions can be used alone or in tandem to allow a business to reinvest in itself while generating additional cash flow through lower tax bills.

Annual Expensing Election

The expensing election, called the “Section 179 election,” now allows a business to deduct up to $100,000 of the cost of qualifying depreciable property placed in service during the tax year.

Example: If your business buys equipment for $100,000 in 2003 and meets the law’s requirements, you may deduct the full $100,000 cost on your business’ 2003 federal tax return, instead of claiming depreciation deductions over several years. For a business in the 35% tax bracket, this means that $35,000 of the cost of that equipment is, in effect, picked up by Uncle Sam this year.

Of course, some requirements must be met.

The amount that can be expensed cannot exceed the business’ annual taxable income from an active trade or business.

Once the total amount of qualifying asset purchases for the year exceeds $400,000, the $100,000 expensing limit is reduced dollar for dollar. (This limit was $200,000 under prior law.) Thus, if your business spends $500,000 or more on qualifying assets during the year, no Section 179 election is available.

The new expensing limit is in effect for the 2003, 2004, and 2005 tax years. Afterward, the expensing election rules go back to the way they were prior to the new law.

Bonus First-year Depreciation

In 2002, a tax law provided for bonus first-year depreciation as a way to help businesses retool during the recession of the early 2000s. The 2003 law expanded the bonus depreciation provisions.

Under the new law, businesses may claim additional first-year depreciation equal to 50% of the adjusted basis (essentially, the cost) of qualified property. In general, the property must be depreciable under the modified accelerated cost recovery system (MACRS) and must have a recovery period of 20 years or less. Most business equipment, etc., falls within that definition. Other qualifying assets include certain computer software and leasehold improvements. The original use of the property must commence with the taxpayer, and the property must be acquired and placed in service after May 5, 2003, and before January 1, 2005. Other requirements and exceptions apply.

Example: Suppose your business buys a delivery truck for $50,000 in 2004. The normal first-year depreciation for the truck would be $10,000. If your business qualifies for the bonus 50% first-year depreciation, you may claim $25,000 of bonus depreciation. On top of that, your business may claim regular first-year depreciation for the remaining 50% of the cost of the truck, or another $5,000. Total first-year depreciation: $30,000.

A Tandem Benefit

As mentioned, a business can use both of the new provisions during the year for its asset purchases. Using these new tax beaks in tandem can result in significant tax savings.

Let’s say your profitable business buys and places in service $150,000 in new qualifying assets in September 2003.

These are the business’ total asset purchases for the year. The business may deduct the following amounts on its 2003 tax return:

$100,000, using the Section 179 expensing election, and

$25,000 of bonus first-year depreciation (50% of the remaining $50,000 of asset purchases), and

regular depreciation on the remaining $25,000 of asset purchases for which expensing and additional first-year depreciation have not been claimed.

Thus, by using both provisions, your business may be able to write off 85% or more of the cost of the acquired assets in 2003.

Take Advantage This Year

The Section 179 expensing election and the 50% bonus depreciation provisions are a “use it or lose it” proposition for each of the next several years. If you don’t purchase qualified assets during the year, you lose the ability to claim these benefits.

Of course, any asset acquisitions should be made with your business goals in mind and tax savings should be a secondary consideration. But, if your business has a need for new assets, using the new law to offset part of the cost of acquiring those assets is smart tax planning. Contact us today to find out more about how the new law can benefit your business.

The information provided in the newsletter has been obtained from sources believed to be reliable but its accuracy is not guaranteed.