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Small Business Help Line – Bracing for the Impending Tax Changes

Bracing for the Impending Tax Changes

Question: What specific changes in the Tax Code for 2003 and 2004 should I be thinking about?

Answer: The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) made numerous changes in the tax law. The act enables small businesses to expense asset purchases up to $100,000. JGTRRA increased the expensing limit on qualifying property placed in service from $25,000 to $100,000. Qualifying property now includes off-the-shelf computer software as well as machinery and other tangible equipment. The section 179 deduction is limited and phased out if the company’s total purchases exceed $400,000. The change in the law is through 2005. The tax savings could be substantial to business owners taxed at higher individual tax rates.

JGTRRA also increases the amount of first-year bonus depreciation from 30 percent to 50 percent. The increase applies to qualified property placed in service after May 5, 2003, and before Jan. 1, 2005. Qualified property for this provision applies to assets with estimated useful lives of less than 20 years. These assets include furniture, computers, leasehold improvements, and computer software.

The ability to use both the increased section 179 deduction and 50 percent bonus depreciation will greatly help the small business owner. Some may find an advantage in expensing certain assets and applying the 50 percent bonus depreciation to other assets in order to maximize their overall deduction.

The 2003 act also increases the amount of depreciation that is allowed for luxury automobiles used in the taxpayer’s business. The limitation for first-year depreciation is increased from $4,600 to $7,650. If you are planning to purchase a new business automobile in the near future, do so before Jan. 1, 2005, to take advantage of the increased first-year depreciation deduction. For the automobile to qualify for the deduction, your use of it for business purposes must be greater than 50 percent. Most of the accelerated depreciation provisions terminate at the end of 2005. Remember to look at “the big picture.” For example, purchasing a luxury automobile just to take advantage of the new depreciation allowance may not necessarily be a good investment.

Written by Jeanne Shannon, president of the San Diego chapter of the California Society of CPAs.

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