Great News for Small Business Owners, Too

Huge Increase in Annual Section 179 Allowance. If you own a small business, the very best part of the new law from your perspective may be the huge increase in the Section 179 first-year depreciation break. Under the much-loved Section 179 rule, you can generally instantly deduct 100% of the cost of most new and used personal property (non-real estate) assets in the year you place them in service. Until the new law, however, this year’s Section 179 deduction was limited to $25,000. That was then. You can now deduct up to $100,000 for tax years beginning in 2003, 2004 and 2005 (subject to a taxable income limitation and another limitation if you add over $400,000 of qualifying assets during the same tax year).

Bottom line: Many small businesses can now deduct the entire cost of all equipment additions in the first year. No more complicated multi-year tax depreciation schedules! (Nobody is going to miss those things.)

The 2003 Act also makes most computer software eligible for the Section 179 deduction, which means you can deduct the whole cost in the year of purchase. (Under prior law, you generally had to depreciate software costs over 36 months.)

What about the sunset rule you ask? Good question. The favorable Section 179 changes will cease to exist after 2005 unless Congress acts. So if nothing happens, the Section 179 allowance will fall back to only $25,000 for tax years beginning in 2006 and beyond.

Bigger and Better Bonus Depreciation Break. Last year’s tax legislation introduced a new first-year bonus depreciation deduction equal to 30% of the cost of new (but not used) assets with a normal depreciation recovery period of 20 years or less. The 2003 Act takes the bonus depreciation idea and makes it bigger and better.

For qualifying assets acquired after May 5, 2003 and before 2005 (and placed in service before 2005, or 2006 for certain assets with long production periods), you can deduct a whopping 50% of cost in the first year. Wow! This break is available regardless of the size of your business. Qualifying assets acquired before May 6th of this year are still eligible for 30% first-year bonus depreciation.

Under a sunset rule, however, the bonus depreciation rule will vanish after 2004 unless Congress takes further action.

More Bonus Depreciation for Business Autos, Too. If you use a car for business purposes, you are no doubt aware of the incredibly unfavorable depreciation rules. Until now, the maximum first-year depreciation write-off for a new (not used) vehicle placed in service this year was a paltry $7,660. Thanks to the new 50% bonus depreciation break, you can deduct up to $10,710 worth of first-year depreciation for new (not used) vehicles acquired after May 5th of this year. For new autos acquired this year but before May 6th, the maximum first-year depreciation deduction is still only $7,660 (under the 30% bonus depreciation rule). For used vehicles placed in service at any time this year, the maximum first-year depreciation deduction remains at only $3,060.

Micro-break on Corporate Estimated Tax Payments. Corporations qualify for a break on this year’s estimated tax payments. Specifically, 25% of the installment otherwise due in September can be postponed until October 1st without penalty. Please hold your wild applause! Still, it’s better than nothing.