Tax strategies for major business expenses.

Tax strategies for major business expenses.

In a simpler tax world that we can only imagine, the way small businesses write off major expenses would be, well, a lot simpler. You'd deduct the costs of all your major purchases in the same year you made them.

The tax laws passed by Congress in 2003 go a long way toward creating that world for most small businesses.

Here are four points to remember when trying to figure out how major purchases will affect your business's tax bottom line.

1. Up to $100,000 allowed in personal property write-offs. As a small business, you can expense, or write off, up to $100,000 of business personal property in 2004 and 2005. Business personal property is stuff like furniture, office equipment and computers. Writing off the full cost in one year is called a Section 179 election, and the election has to be made in the year of purchase. That means you cannot buy a computer this year and then try to expense it next year, or take the personal computer you bought for your home in 2003 and try to write off the full cost when using it in your business in 2004 or 2005.You have to use the property more than half the time for business to qualify for Section 179 treatment, and the deduction is proportionately reduced for anything not used solely for business. That means that if you buy a $2,000 computer and use it 75% for business, the maximum amount you can write off is $1,500.If you want to see how much small businesses love the Section 179 deduction, take a little time between Christmas and New Year's Day to peek inside any store that sells office furniture or equipment. Chances are you'll see lots of buyers racking up some year-end deductions.Note: The $100,000 maximum is reduced for businesses that buy more than $400,000 worth of personal property in a year. The reduction is dollar-for-dollar for amounts over $400,000. So, for example, if your business spends $410,000 on equipment,
the maximum Section 179 write-off is $90,000.

2. An office building is not personal property. You'll notice that this $100,000 deduction opportunity refers to "personal property."This is important to note: Real estate is not personal property. (My apologies to anyone who thinks that is obvious, but believe me, people have bought office condos thinking they could write off a big chunk of the cost in the first year.)Nonresidential real estate, such as office or industrial properties, has to be depreciated over 39 years. And only the building qualifies for depreciation (i.e., you cannot depreciate unimproved land). Add it all up, and it means that your first-year depreciation write-off on a business building is probably going to be less than 2% of the purchase price. Sorry.

3. Cars aren't personal property, either. The rule on deducting the cost of a business vehicle you own used to be simple, and onerous: The deduction in the year of purchase was limited to $3,060, plus business-related operating expenses.Now the rule is more liberal, but also more complicated. Automobiles purchased in 2003 or 2004 qualify for a special "bonus depreciation" of $7,650, on top of the $3,060 limit, for a total first-year depreciation deduction of up to $10,710.However, there are — surprise! — some exceptions to this rule for vehicles that are not considered ordinary passenger cars. Most significantly, you could get to apply the full Section 179 expense deduction (assuming you had no other business equipment purchases) against the purchase of a vehicle that qualifies as a truck. You could even deduct the entire purchase price of the vehicle in the year that you buy it.

4. Spent more than $100,000? You could still get a larger deduction. You could wind up with more than $100,000 in equipment deductions for 2004, even with the Section 179 limit in place.Here's how (it's also complicated). Let's say you're a physician, video producer or other professional who might have to spend $150,000 in a year on business equipment that qualifies for the Section 179 deduction. You could get a write-off of $100,000 in equipment under Section 179. You also could get the special bonus depreciation of 50% on the remaining balance, for a write-off of an additional $25,000.And then you'd still get your regular depreciation on the remaining $25,000 worth of equipment.

The overall result is that even if you spent as much as $150,000 on qualifying business equipment in one year, you could still take a first-year write-off of more than 85% of those costs.

Confused? See a tax pro

There are other rules and restrictions on writing off major business purchases. For example, farmers can get special treatment for certain single-purpose agricultural buildings such as greenhouses. Your Section 179 deductions can be limited by your overall taxable income from a trade or business; limitations also apply if you're reporting Section 179 expenses from multiple businesses. And these liberal deduction rules are expected to be tightened again after 2005.

Already, several states have acted to restrict the upfront deduction on 6,000-pound SUVs, which means that you could wind up having to keep track of different depreciation schedules and deductions for your state and federal income taxes.

Like I said, this stuff isn't simple. Talk with a tax pro before year-end if you need more help with your major purchases.

Article source: http://www.microsoft.com/smallbusiness/resources/finance/small-business-tax-advice.aspx#Taxstrategiesformajorbusinessexpenses