Tax Law Changes Can Help You Save on Equipment

As we all know, last spring President Bush signed into
law a new round of tax cuts totaling $350 billion.
While the biggest boon will go to individual taxpayers
from the officially named Jobs and Growth Tax Relief
Reconciliation Act of 2003 — and many small businesses
will benefit since they pay taxes as individuals —
there is also specific tax relief in the legislation
for small business to smile about.

by Steve Strauss NFIB.com

One major advantage to independent businesses is the
fantastic liberalization in IRS regulations with regard
to what is called the "Section 179 Allowance." Most of
us know this law as the depreciation rules for
equipment we buy for our businesses: furniture,
equipment, etc.

Previously, as you likely know, a significant portion
of these sorts of business assets had to be depreciated
over a five- to seven-year time span. Under the new
Section 179 law however, you can now deduct 100 percent
of the cost of almost all new and used assets in the
year that you buy them.

Here are the specifics: You can deduct up to $100,000
for any tax year for any asset acquired after May 5,
2003. For almost all small businesses then, this
translates into an immediate large deduction for any
major purchase made in the second half of this year.
Previously, the deduction topped out at $25,000, so you
see this is a four-fold increase.

Another nice feature of the new Section 179 rules is
that computer software is now eligible for the
immediate 100 percent deduction too, as opposed to the
old rule where you had to depreciate software over
three years.

"Bonus depreciation" improved with the new law as well.
Bonus depreciation applies when your asset purchases
are more than the single-year expensing limit (in this
case, $100,000.) When that happens, you still must
depreciate the property over time.

These new rules also impact business autos. Previously,
a new business car could be depreciated up to a maximum
of $7,660 in Year One. The new rules up this amount to
$10,710 (again, for cars purchased after May 5, 2003.)

It used to be that you could immediately depreciate 30
percent of the cost of new equipment if you are over
the limit. Now if you buy more equipment than you can
expense in a single year (and thus must depreciate them
over time), you will be allowed to immediately deduct
50 percent of the cost. It is important to understand
that this rule is set to expire Dec. 31, 2004.

There are a few wrinkles in the law that you should
know about:

* Section 179 depreciation is allowed for new and used
property, while only new assets are eligible for the
bonus depreciation.

* You cannot use the Section 179 rules for property and
equipment that is used less than fulltime in your
business, but you can use the bonus depreciation if
that’s the case.

* Both Section 179 and bonus depreciation are federal
laws. State laws do not mirror these rules, so check
your tax liability carefully in your state as well.

The upshot is that these more liberal rules will allow
you to purchase business assets now, even via
financing, and get great tax breaks next year.
Therefore, especially if your business has a Dec. 31
ending to its tax year, you may want to seriously
consider purchasing necessary business assets in order
to reduce your tax bite come April 15.

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