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Two Tax Law Changes Every Start-Up Should Know
Mario Iezzoni, CPA, MBA
Certified Business Analyst, USF/SBDC
Most people going into business have a general sense they can deduct from sales revenue just about anything related to the business. Beyond this general knowledge, start-up owners should become familiar with details of two recent changes in the tax code.
The Jobs and Growth Tax Reconciliation Act of 2003 increases significantly the "Section 179" and "Bonus Depreciation" deductions available to small business owners. Both deductions are designed to help stimulate the economy by providing incentives to businesses that purchase new equipment.
Internal Revenue Code Section 179 permits you to expense the full cost of certain assets in the year you acquire them up to $100,000. Generally, it applies to anything that is not physically attached to real-estate. Items like computers, machinery, office furniture, equipment and certain vehicles would qualify.
A draw back to using the "179" deduction is that you cannot use it to create a loss. Once you drive out all off your profit, the unused portion is carried forward to the next year. The $100,000 deduction will only be good for three next years. In 2006 the threshold will return to $25,000.
Bonus Depreciation is another tax law change small business owners should comprehend. It came into existence immediately after September 11, 2001. Bonus Depreciation allows you to take an additional 50% in depreciation expense if you use the normal IRS MACRS depreciation. Like the "179" deduction it is applied in the first year of the asset acquisition.
Depending on the asset class life, using the bonus depreciation can triple the first year write-off of that asset. This deduction applies to a greater variety of assets which include most non-realty assets. Unlike the Section 179 deduction, you can use this depreciation to create a business loss. The Bonus Depreciation deduction will expire on December 31, 2004.
Why are these changes so important to the start up business owners?
Three reasons!
I. You can legally reduce your profit to avoid paying taxes.
A business having a very profitable year or unexpectedly receives a large customer payment at the end of the year can go shopping at the last minute for needed equipment to remove the profit. The savings in taxes could be as much as 45%. A savings, that could be used to help pay for the new equipment.
II. Flexibility in the amount you want to write-off.
Since, most start-ups roll their profits back into their business, the use of these deductions provide flexibility in allocating the depreciation expense after the tax year has ended. A good tax preparer can look at your asset purchases and adjust both types of special depreciation to assure that you attain the maximum benefit in the current or later years, whichever benefits you the most.
III. Get tax dollars paid to a previous employer to help you with your start-up.
Someone who has lost their job and wants to pursue the dream of owning a business can use the law to help fund their start up. The bonus depreciation can create a loss that can be applied against other earnings in the same year. It gets back for you, taxes withheld from your previous employer by helping reduce your yearend income.
Starting a business is like learning a new language. There are terminologies and phrases that are absolutely essential for navigation. Do you want to row or sail your boat across the ocean? Becoming familiar with the tax code is a perquisite to understanding business dialect. It will enable you to communicate with professionals who use the language fluently. They can help you grow, manage and expand your business at a considerably less cost when all players are speaking in the same tongue.
» Mario Iezzoni is a Certified Business Analyst with the University of South Florida’s Small Business Development Center and a columnist for FloridaStartup.com.
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