Small Business Tax Planning Tips

Small business expensing

Retroactive to January 1, 2003, the size of available “section 179 expensing” (also called “small business expensing”) has increased four-fold to $100,000 annually.  The ceiling on the amount of qualifying assets that may be purchased before phaseout of the deduction has jumped from $200,000 to $400,000, each year. This generous tax break, however, is temporary, for 2003-2005 only. Delay may be your enemy. If you wish to take advantage of the maximum $100,000 limit for each year, action before year-end is required. Planning to maximize the section 179 deduction, however, should not be done without consideration of all relevant factors – it could short change your business on other deductions. Selecting assets with longer depreciable lives for expensing and choosing to depreciate assets with shorter lives, for example, usually works best.

Small business bonus depreciation

The special 30 percent bonus first-year depreciation also increases to 50 percent starting in 2003. To qualify for the higher percentage, however, property must be acquired after May 5, 2003, and placed in service before January 1, 2005. Unlike section 179 expensing, no dollar cap limits the amount of bonus depreciation that you may take each year. You can defer purchases into 2004 and not lose out on any part of this deduction. However, pushing all purchases into 2004 may raise the level of section 179 expensing property purchased that year, which can in turn lower available expensing under that deduction’s phase-out rules. Depending on your income projections, you may even want to “elect out” of bonus depreciation entirely in 2003. In any case, gathering all the facts applicable to your particular business situation, and acting upon them before 2003 ends, is one general rule that all business owners should follow.

Heavy SUV Strategy

SUVs bought in the same year of depreciation, which are trucks, are exempt from the luxury-auto rules if they are rated at more than 6,000 pounds gross (loaded) vehicle weight. Many luxury and near-luxury-class SUVs fall in this category (your auto dealer can tell you the vehicle's weight classification). As a result, if you have already bought or will buy a heavy SUV this year for use in your business, you may choose to expense, that is currently deduct for 2003, the entire cost of the vehicle if it costs $100,000 or less (if you otherwise qualify under the "Sec. 179" expensing rules). If you bought the heavy SUV last year, your expensing deduction for it would have been limited to $24,000.  (The Sec. 179 expensing limit increased to $100,000, as mentioned about)  Alternatively, if you use your expensing allowance for other assets, you can claim a 2003 depreciation deduction of up to 60% of the cost of the vehicle.  For example, suppose you buy a $40,000 heavy SUV in 2003 and use it 100% for business. Your expensing deduction for 2003 is $40,000 if it's a new or used heavy SUV bought and placed in service any time in 2003. You can claim a $24,000 depreciation deduction for 2003 if you bought a new heavy SUV costing $40,000 after May 5, 2003 and don't expense any of its cost.