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In this section we present you with short newsletters containing
timely and useful information. |
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2003 Tax Act – Business Provisions |
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The 2003 Tax Act contains several important provisions that small to
medium sized business owners should be aware of. This article tells
you what you need to know to take full advantage of the
opportunities provided. |
Small, owner-managed businesses will be the primary beneficiaries of
the 2003 Tax Act. A four-fold increase in the “Section 179” limit on
direct expensing of the cost of personal property, 50-percent
additional first-year “bonus” depreciation, and income tax rate cuts
on individual income can add up to substantial savings.
Larger enterprises will also share in some of the benefits. While
there are limits on equipment purchases entitled to direct
expensing, bonus depreciation is available to very large enterprises
without limitation. A relatively minor benefit is provided to large
corporations, who are given additional time to make their estimated
tax payments for the third quarter of 2003.
Direct expensing – IRC Sec. 179
Business taxpayers that acquired less than $200,000 worth of
qualifying property during a year have been allowed an election to
immediately deduct, rather than depreciate over time, up to $25,000
of its cost. The 2003 Act increases that amount to $100,000 and
raises the limiting threshold of total personal property
acquisitions from $200,000 to $400,000. Qualifying property placed
in service in tax years beginning in 2003, 2004 and 2005 will be
eligible for the expanded expensing election, and for 2004 and 2005,
the $100,000 limit will be indexed for inflation.
Qualifying property continues to be defined as depreciable tangible
personal property acquired for use in the active conduct of a trade
or business. Since it first became part of the tax law, an election
to expense such assets could only be made on the taxpayer's original
return for the tax year when the assets were placed in service. To
assure that no taxpayer misses the benefit due to confusion about
the new law, in 2003, 2004, or 2005, the election can be made or
revoked on an amended return without IRS consent.
Another break for business in the new law permits taxpayers to
expense off-the-shelf computer software placed in service in tax
years beginning in 2003, 2004 or 2005 as qualifying property. Under
prior law, off-the-shelf computer software was not “qualifying
property.”
Carefully planning which assets to choose for expensing will
maximize tax savings. Since the election to expense may be applied
to the entire cost, or a portion of the cost, of one or more items
of qualifying property, it is to your advantage to allocate the
expense allowance to property with the longest recovery period. For
example, if an item of 7-year recovery property and an item of 3
-year recovery property are placed in service in the same year, the
available expense election should be allocated first to the 7-year
property. That way, the cost of all the property will be recovered
in the shortest possible time.
Nothing in the Act changes the law regarding what is deductible as a
current expense and what must be capitalized and depreciated. If you
can argue that a purchase qualifies as an ordinary business expense,
rather than a capital asset with a useful life of more than one
year, the entire purchase price is deductible in the year of
purchase, with no need to elect expensing and without using any of
your $100,000 limitation.
First year bonus depreciation
Bonus depreciation increases to 50 percent for property acquired
after May 5, 2003, and before January 1, 2005. Property acquired
pursuant to a binding written sales contract that was in effect
before May 6, 2003, qualifies for only the old 30 percent bonus
depreciation. Remember that regular depreciation rules will apply to
the balance of an asset's cost after the bonus depreciation is
deducted, and if you don't need all that depreciation right now, you
may elect out of the first-year bonus depreciation.
However, if you need all the deductions you can scrape up, you can
combine Sec. 179 expensing, 50-percent bonus depreciation, and
regular cost recovery rules applied to any remaining basis . . . all
in the first year of service. But be careful! Not all property
qualifies for both special write-off provisions. For example, bonus
depreciation is only allowed on the first use of new property, while
expensing may be elected for either new or used property. Property
acquired between September 11, 2001 and May 6, 2003 continues to be
eligible for the 30 percent bonus depreciation.
To conform auto depreciation dollar limits to include enhanced bonus
depreciation, the new law raises the bonus depreciation amount that
may be taken with respect to automobiles from $4,600 to $7,650.
Bonus depreciation is still depreciation, and the 50-percent
deduction is subject to recapture as ordinary income under IRC Sec.
1245 when depreciable property is sold at a gain.
Corporate estimated tax payment postponed
The Act also provides that 25 percent of corporate estimated tax
payments otherwise due on September 15, 2003, may be deferred to
October 1, 2003.
If you have any questions about how the new Tax Act of 2003 affects
your business, just Contact Us.
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