The tax bill Congress passed in May contains many significant changes that benefit small businesses.
Several deductions are available to encourage small businesses to make new investments. If a business purchases "Section 179" property (such as machinery, equipment and livestock), they have the option of taking depreciation over the useful life of the asset or to expense it in the year purchased. The limits on expensing increased from $25,000 per year to $100,000 per year for property purchased after May 5, 2003.
Another option available for assets with a life of less than 20 years is to take a special 50 percent bonus depreciation in the first year or 30 percent bonus depreciation in the first year. These options apply to property purchased between May 5, 2003, and Jan. 1, 2005. (The 50 percent bonus depreciation on vehicles is limited to $7,650.)
Other changes include medical and long-term care insurance, which is now 100 percent deductible, regardless of the legal structure of your business. The business mileage standard rate is 36 cents per mile, retirement plans allow for larger amounts of contributions and the standard deduction "marriage penalty" for those married, filing a joint return, is eliminated.
The 10 percent income tax bracket has expanded; the 15 percent income tax bracket is expanded for married couples filing a joint return; and the remaining tax rates are reduced from 27 percent to 25 percent, from 30 percent to 28 percent, from 35 percent to 33 percent and from 38.6 percent to 35 percent.
Dividends are taxed at capital-gains tax rates. Long-term (assets held for more than one year) capital-gains tax rates have been reduced from 20 percent to 15 percent (from 10 percent to 5 percent if in the 10 percent regular income tax bracket). The alternative minimum tax exemption also increased.
To assist employers in providing child-care services, the employer-provided child care tax credit allows for 25 percent of costs (up to $150,000 per year) for employer contributions to employee child care.
To encourage small businesses to establish pension plans, a tax credit of 50 percent of the start-up costs ($500 maximum) is available for businesses for up to three years if they have less than 100 employees receiving at least $5,000 per year. Employers hiring people who qualify for welfare-to-work or work opportunity status will receive a credit for wages paid in 2003.
Tax returns are simplified for businesses with less than $250,000 in revenues and assets. Net operating losses carry back five years (starting with the 2001 tax year) or carry forward for 20 years.
The new tax bill creates many tax planning opportunities for small-business owners, resulting in lower taxes. Consult your accountant for further details.
Thom Thies is a business consultant with the Small Business Development Center Network. To reach the Augusta office, call 737-1790.