I'm sure you've heard that warning many times in an attempt to pressure you into making a decision. The tax law also expresses that thought by setting deadlines for the phasing out of various tax incentives.
At the end of 2004, a substantial and important business incentive -- the ability to write off as "bonus depreciation" 50 percent of the purchase of new equipment, furniture, fixtures, qualifying business vehicles and computer software purchased and put into service by Dec. 31, 2004 -- will be phased out.
This tax incentive was implemented for purchases made after May 5, 2003, to spur the economy.
A qualifying business vehicle is one that weighs more than 6,000 pounds. For vehicles weighing less, the 2004 depreciation write-off for 100 percent business vehicles is limited to $10,610. In 2005, the maximum depreciation deduction for a typical passenger car or light duty truck used 100 percent for business will be limited to a maximum of $7,560.
Other depreciation incentives are still in effect for 2004 and 2005, such as section 179, which allows for the deduction of the first $100,000 of new and used personal property purchases, such as furniture, fixtures, equipment and certain vehicles, in a year. The $100,000 write-off is available for a business that hasn't spent more than $400,000 for those types of assets during its business year. This provision is still in place through 2005.
However, it's imperative to recognize that the 50 percent depreciation deduction provision is not limited to a maximum purchase of personal property during the year. In fact, the bonus depreciation can be used to create a net operating loss that can be carried back to the previous two tax years to generate refunds of taxes paid in those years.
Business owners with large capital outlays should consider the cash flow and tax savings from accelerating their purchases into 2004 to take advantage of this 50 percent write-off.
Additionally, with respect to building new facilities or additions, a cost segregation study should be considered in order to identify aspects of the construction that will qualify as equipment and machinery and thus the 50 percent write-off incentive.
Business owners considering leasing equipment, machinery or qualifying vehicles should consider as an alternative arranging for an installment purchase in order to qualify for the 50 percent write-off of the leveraged purchase. Now is the time to begin discussing year-end equipment financing with your banker or supplier.
The term "placed in service" means that the equipment or other personal assets are in a delivered stage and are in a condition and state of readiness to be used. Therefore, it is important that end-of-the-year purchases be installed to the point of flipping a switch to begin their operation.
The federal income tax law also provides an incentive for individuals who are planning on getting married in 2004 versus early in 2005. The "marriage penalty" is imposed on a couple filing a joint return, which causes them to pay an increased amount of tax over what they would pay if they were single.
The tax law approached providing some relief to couples by expanding the amount of income taxed at the 15 percent bracket. At the end of 2004, the marriage penalty will increase and could cost a newly married couple an additional $338 in 2005. Individuals planning on marriage shortly after Dec. 31 might want to accelerate their plans to 2004 to take advantage of the lower "marriage penalty" tax rates of 2004.
A tax principal at Tauber & Balser, Harvey S. Cohen (firstname.lastname@example.org) has more than 33 years of experience with a strong concentration in taxation, tax aspects of bankruptcies and small to mid-size businesses. Harvey has developed expertise in S corporations and limited liability companies. He has worked with clients establishing their retirement plans and has experience in forensic accounting focusing on tax matters. You can reach Harvey at (404) 814-4930.