The big tax news for businesses last year was passage of the Jobs and Growth Tax Relief Reconciliation Act. Designed to stimulate the economy by offering employers breaks in areas including capital investment, the nationwide savings for employers has been pegged by some in the industry at more than $850 billion.
With the economic outlook for this year cautiously optimistic, now may be the time for businesses to tap into some of those breaks, particularly since provisions in the act are temporary. Each provision expires on a certain date unless Congress extends it, and that may be unlikely given the current size of the budget deficit.
One of the act's major features for business owners is a provision that boosts the expensing allowance to $100,000 for firms that put less than $400,000 of assets into use in a year. Before the act, such firms could only write off, or expense in lieu of depreciation, up to $25,000 in business property/assets placed in service in a year. Now, property placed in service in tax years beginning in 2003, 2004, and 2005 is eligible for the special expensing treatment; for 2004 and 2005, the amounts will be indexed for inflation.
But this provision only lasts through 2005, so some experts including the Chicago-based tax-research publisher Commerce Clearing House are advising business owners to purchase new equipment now to take advantage of the provision before it is scheduled to revert to the original $25,000 expensing allowance in 2006. Others are more cautious, however. Dennis Filangeri, a certified financial planner in San Diego, urges business owners to review their financial situations carefully. "Don't go out and buy equipment you don't need just because you can expense it now."
Another provision of the act allows business owners to deduct the cost of sport utility vehicles and pickup trucks that weigh more than 6,000 pounds – when fully loaded with passengers and cargo – if used in the business. This provision allows businesses to write off the full cost of such vehicles in the first year of ownership rather than accounting for it through depreciation.
The act also increased the percentage of the cost of new capital assets that businesses can depreciate – 50 percent compared to 30 percent. Businesses that buy new capital assets and place them in service between May 5, 2003, and January 1, 2005, can claim the 50 percent depreciation. But again, this provision only lasts for a little while - through 2004.
With the act's increased expensing allowance and depreciation bonus, a small business can write off up to 67 percent of the cost of new assets in the first tax year. Normally, the amount of capital equipment a business can depreciate is determined by using what the Internal Revenue Service calls the Modified Accelerated Cost Recovery System. This produces different depreciation periods depending on the type of equipment acquired.
For example, say your business spent $50,000 on a computer system and other office machinery. Under the normal depreciation system, the purchase would qualify for five-year depreciation. But the new act allows depreciation of 50 percent of the outlay, or $25,000, right away. The usual depreciation system allows a business owner to write off an additional $5,000 for a total first-year depreciation of $30,000. If your incorporated business is in the 34 percent tax bracket, the new tax law saves you $2,720 in taxes in 2004.
But Filangeri notes that equipment contracted for before May 6, 2003, despite delivery in 2004, does not qualify for the 50 percent bonus rate. And, he says, "Be careful. Expensing is easy to understand and use, but depreciation is very complex. Get some help from a certified financial planner to help you maximize the usefulness of this benefit."
The Bottom Line
The Jobs and Growth Tax Relief Reconciliation Act provides some interesting opportunities for business owners, but they need to be acted on rather quickly before the provisions run out. And because of the act's complexity and temporary nature, seeking professional advice is highly recommended.
Milton Zall, president of the editorial consulting firm Zall Enterprises in Silver Spring, Maryland, specializes in tax, investment, and human-resources issues.
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