Small Business Taxes – New Law Turns Tax Loophole Into a Crater
Tired of dealing with those complex depreciation rules? Thanks to recent tax law changes, here’s how to avoid them completely while benefiting from a lucrative small business tax break that not only puts money in your pocket, but also makes the filing of your income tax return much simpler.
If you are a Small Business Owner or Self-Employed Person, this is one tax break you must know and use.
It’s actually an expansion of a tax rule that’s been on the books for years. Known as the Section 179 deduction, the new legislation takes this loophole and turns it into a deduction big enough to drive a fleet of SUV’s through.
The Section 179 deduction enables the Small Business Owner to deduct 100% of the cost of most business equipment, in lieu of depreciation over several years.
What’s so great about that?
Think about it like this: I’ve got a dollar and I’d like to give it to you. You have two choices — I give it to you now, or I give it to you 5 years from now.
Which do you prefer?
Obviously, you’d rather have it now, right?
And why is that?
Because of what you learned way back in Finance 101: something your banker calls “the time value of money.”
I’ll spare you a boring textbook definition. Instead, let’s just assume we agree on this simple point: Is a dollar worth more today or 5 years from today?
It’s worth more today, right?
And that’s why the Section 179 deduction is so valuable.
Let’s use an example to bring all this financial theory into reality.
You buy $5,000 worth of office equipment in 2008. Under normal depreciation rules, you wouldn’t get to take a deduction for $5,000 in 2008. Instead, you’d write off the $5,000 over 6 years — part in 2008, part in 2009, etc.
If you’re in the 35% tax bracket, you get your $1,750 in tax savings over 6 years. Yawn. That’s a long time!
You’d get your deduction, and the resulting tax savings, but you’d have to wait 6 years to realize all the benefits.
Section 179 says that if you meet certain requirements, you can deduct the full $5,000 in 2008. You reduce your taxes by $1,750 in Year 2008.
So let me repeat my question: Uncle Sam has $1,750 he’d like to give you. When do you want it? All at once, or spread out over 6 years?
That’s the beauty of Section 179.
Here’s how it works. The maximum amount of business property that can be immediately deducted rather than depreciated has been increased over the past few years:
Year 2003 — $100,000
Year 2004 — $102,000
Year 2005 — $105,000
Year 2006 — $108,000
Year 2007 — $125,000
Year 2008 — $250,000
Year 2009 — $128,000 (plus a Cost of Living Adjustment)
Year 2010 — $128,000 (plus a Cost of Living Adjustment)
Year 2011 — $25,000
Never liked depreciation? Well, you can pretty much kiss it good-bye now.
IMPORTANT: A few other requirements must be met to claim the Section 179 deduction. Here’s a brief overview:
1. Most personal property used in a trade or business can be deducted via Section 179. Real property cannot. Typical examples of personal property include: office equipment such as computers, monitors, printers and scanners; office furniture; machinery and tools. Real property means buildings and their improvements.
2. In 2011, unless new legislation is passed, the Section 179 amount goes back down to $25,000.
3. There are special rules regarding the use of Section 179 to the purchase of business vehicles. For example, the special “SUV rule” that allowed 6,000 LB vehicles to be fully deducted (up to the $100,000 amount) was changed to $25,000, effective October 22, 2004.
4. Your total Section 179 deduction is limited to the business’ annual profit. In other words, you cannot use the Section 179 to create or increase a loss.
This is known as the “taxable income limitation.” For “C” Corporations, this limitation is very cut and dried. But if your business is an “S” Corporation, Partnership, LLC, or Sole Proprietorship, it may not be as limiting as it seems. For these non-“C” Corp businesses, the Section 179 deduction can be used to offset both business and non-business income.
And if you’re married filing jointly, the Section 179 deduction can offset your spouse’s income, including W-2 income.
Example: You start a new business in 2008 that ends up with a loss for the year of $5,000 (before taking the Section 179 deduction). Your spouse has W-2 income of $60,000. Even though your business is unprofitable, you can still take the full Section 179 deduction of $5,000 (again, assuming your business is an entity other than a “C” Corporation).
(Be sure to consult with your tax professional to get the scoop on all the Section 179 rules.)
Be sure to take advantage of this new loophole. A very nice deduction just got expanded to monstrous proportions!
Take advantage of it.