A column on personal finance prepared by the Virginia Society of Certified Public Accountants
2003 TAX ACT ENCOURAGES SMALL BUSINESS GROWTH
(July 18, 2003) - Small businesses and their owners were among the big winners in the Jobs and Growth Tax Relief Reconciliation Act of 2003 reports the Virginia Society of CPAs. Not only will millions of self-employed small business owners directly benefit from the Act’s reduction in marginal interest rates, but two measures – an increase in the small business expensing election limit and an increase in the first-year bonus depreciation percentage – are designed to encourage small business spending on new business equipment.
Small business owners benefit from tax rate reductions
The accelerated reduction of tax rates will benefit small business owners, especially those who operate as sole proprietorships, partnerships, or similar “flow-through” business entities, and pay taxes on their business income at individual tax rates. Retroactive to the beginning of 2003, the 27 percent bracket falls to 25 percent; the 30 percent rate to 28 percent; the 35 percent to 33 percent, with 35 percent becoming the tax income tax rate, down from 38.6 percent. The existing 10 and 15 percent tax brackets remain unchanged.
Section 179 write-off amount quadruples
For most businesses, the best part of the new Act is the substantial increase in the Section 179 expensing election, which allows small businesses to deduct 100 percent of the cost of qualifying business property, such as equipment, furniture and fixtures, purchased and put into use during the tax year, within certain limits.
Under the new law, this expensing election increases from $25,000 (in 2002) to $100,000 for the 2003, 2004, and 2005 tax years. This means that, for the next three years, many small businesses will be able to deduct more of their purchases in the year purchased instead of deducting them over a number of years.
As a result of the new law, some business owners will also find it more cost-effective to streamline operations through software solutions. That’s because the new Act also makes off-the-shelf computer software placed in service in 2003, 2004, and 2005, eligible for the expensing deduction. Previously, such software had to be written off over three years.
The Section 179 allowance is reduced dollar-for-dollar on total assets placed into service during 2003 that exceed $400,000, up from $200,000 in 2002. For 2004 and 2005, this amount will be indexed for inflation.
Small business owners should be aware that without the enactment of new legislation, the $400,000 phase-out threshold will return to $200,000 in 2006. And the maximum amount that can be expensed will revert to $25,000. Business owners should plan their purchasing strategies with this in mind.
Finally, as a result of the 2003 Act, taxpayers now can make or revoke expensing elections on amended returns without prior IRS consent.
Bonus depreciation increases to 50 percent
The Job Creation and Worker Assistance Act of 2002 included a first-year bonus depreciation deduction equal to 30 percent of the cost of qualifying assets. Under the 2003 Tax Act, this special first-year bonus depreciation allowance increases to 50 percent. The 50 percent depreciation applies only to new property acquired after May 5, 2003, and placed in service before January 1, 2005. Qualifying assets purchased before May 6, 2003, remain eligible for the 30 percent first-year bonus depreciation break. The 50 percent first-year bonus depreciation is not in addition to the 30 percent bonus depreciation under the 2002 Act. However, a business may combine an increased 179 expensing write-off with the 50 percent bonus depreciation of the remaining assets.
Note that property subject to a binding, written sales contract in effect before May 6, 2003, will not qualify for the 50 percent bonus depreciation. Also, be aware that bonus depreciation will vanish after 2004 unless Congress votes to extend the provision.
Some small business owners may elect to continue to use the 30 percent rate. For example, a taxpayer who expects to be in a higher tax bracket in future years may want to use the 30 percent rate rather than the 50 percent rate or elect out of bonus depreciation entirely. This election is made on your tax return by attaching a statement that states your intent.
Tax Act complexities call for professional advice
CPAs point out that while both the expensing election and the 50 percent bonus depreciation allow you to write off property much faster, there are important differences. For example, it’s important to note that the higher expensing election limit applies to all of 2003, while the 50 percent bonus depreciation pertains only to those purchases made after May 5, 2003. Note, too, that the Section 179 election can be taken on new or used property. The bonus depreciation applies only to brand new assets.
Given these complexities and the many sunset rules, small business owners should consult with a CPA tax professional before making substantial asset purchases.
The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at www.vscpa.com.
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