8/1/2003
YOU can’t afford NOT to buy new equipment, Milt Zall
Tax-Cut Deal Raises Expensing, Depreciation for Small Businesses
By Milt Zall
The big news is the passage of new tax legislation, the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRA). Congressional conferees on May 22 cobbled together a $350 billion economic stimulus package that President Bush signed into law.
A major feature of JGTRA for engine builders is an increase in the expensing allowance from $25,000 to $100,000 for firms that put less than $400,000 of assets in use in a year. This provision is retroactive to Jan. 1, 2003, and will last through 2005.
Engine builders and machine shops should purchase as much new equipment as they can now to take advantage of the new $100,000 expensing limit because the expanded expensing amount is scheduled to revert to $25,000 – the present amount – in 2006.
Will congress allow this to happen? No one can say. Who knows what the economic situation will be in 2006? With the deficit growing by leaps and bounds, this may be your last tax saving opportunity for a long time. If you are looking to purchase equipment, there is no better time than now to do it.
JGTRA also allows you 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, so you can write off the full cost of such vehicles in the first year of ownership and do not have to depreciate them. Now’s your chance to write off the full cost of a shop truck – even a Hummer.
Engine builders and machine shops can also accelerate depreciation to 50 percent of the cost of new assets from the current 30 percent on capital assets bought and placed in service between May 5, 2003, and before Jan. 1, 2005. This provision lasts through 2004. The rest of the cost is recovered by depreciation.
With the increased expensing allowance and depreciation bonus, firms that buy new assets can write off up to 67 percent of the cost in the first tax year. Normally, the amount you can depreciate is determined by using what the IRS calls the Modified Accelerated Cost Recovery System (MACRS). This produces different depreciation periods depending on the type of equipment acquired.
For example, say you spend $30,000 on a dynamometer and build a soundproof room for $30,000, for a total of $60,000, plus spend $20,000 on a computer system and other office machinery that would ordinarily qualify for five-year depreciation. JGTRA allows you to depreciate 50 percent (half) of your $80,000 outlay, or $40,000, right away. In addition, the MACRS allows you to write off an additional $16,000 for a total first year depreciation of $56,000.
If your incorporated business is in the 34 percent tax bracket, the new tax law saves you $10,540 in taxes in 2003. However, if your tax advisor says it is to your advantage – all things considered – to use the 30 percent depreciation rate, you can elect to do that.
Note: Equipment contracted for before May 6, 2003 does not qualify for the 50 percent bonus rate. Be careful though: expensing is easy to understand and use, but depreciation is very complex. Get professional help to maximize the usefulness of this benefit.
Many dividends are taxed at capital gains rates in the new law. This means dividends will be taxed at either 5 percent or 15 percent. Closely held firms will want to review how owners are compensated. The old adage about high salary and low dividends is now reversed, now that dividends are tax advantaged.
Revised tax withholding tables are now available from the IRS at www.irs.gov/pub/irs-pdf/n1036.pdf. They reflect all the personal income tax rate changes. Employers can use them now.
The cost of off-the-shelf computer software can be expensed under JGTRA. Previously, businesses had to write off purchases over three years.
More of the costs of business autos and light trucks qualify for expensing. The first-year write-off ceiling for them rises to $10,710. To maximize deductions if you are placing over $100,000 of assets in use in any one year, expense the assets that have longer depreciation lives. That will allow you to maximize your total deductions; combining expensing and depreciation.
The accumulated earnings tax and personal holding company tax falls to 15 percent under JGTRA but not permanently. There is a short deferral for the corporate estimated tax payment ordinarily due September 1, 2003. You now have until October 1, 2003 to make this payment.
Other news of interest
The IRS reports that some small corporations have been reporting and paying alternative minimum tax (AMT) for which they are not liable. AMT was repealed for qualifying small corporations for tax years beginning after December 31, 1997, but some of these businesses continue to compute and pay AMT. A small corporation qualifies for the AMT exemption if:
The current tax year is the corporation’s first year of operation, or the corporation’s average annual gross receipts for its first three years after 1993 and before the current year did not exceed $5 million; and the corporation’s average annual gross receipts for all subsequent three-year periods did not exceed $7.5 million.
You can now get a tax ID number from IRS over the Internet. Private firms can fill out Form SS-4 online and get a tax ID number right away. Go to www.irs.gov/smallbiz for full details.