Tax Saving Tips For Small Businesses
If you own a small business, there are a number of moves you can make before year-end that can save big on your taxes.
Congress passed five pieces of major legislation in 2008 that contain significant tax benefits, mostly aimed at helping the slumping economy. But you need to act quickly to take advantage of some of the biggest savers.
Depreciation
Most businesses purchase property and equipment for use in the business. Congress enacted some generous provisions to depreciate these assets if purchased and placed in service in 2008.
The first of these is the election to expense the cost of equipment in the year placed in service, commonly referred to as the Section 179 deduction. Prior to the law change, the limit on this deduction was $128,000 and was phased out if total equipment purchases exceed $510,000. For 2008 only, the maximum deduction is $250,000 and the phase-out begins at $800,000.
Congress has also brought back, for 2008 only, the “bonus” depreciation provisions that were enacted after September 11, 2001. The current version allows a deduction of 50 percent of the cost of eligible property in the year placed in service with no dollar limitation. This provision can be used in addition to the Section 179 deduction (but the same cost cannot be deducted twice) and it applies to certain types of property that are not eligible for Section 179, such as computer software and some real estate improvements, and the property must be new.
As an added bonus, any property for which the Section 179 deduction or bonus depreciation is taken does not count toward the mid-quarter convention. This convention sharply limits the amount of depreciation allowed in the year of acquisition if more than 40 percent of all acquisitions other than real estate are made in the fourth quarter of the year.
Business Vehicles
The tax laws limit the amount of annual depreciation that can be claimed on automobiles and light trucks used for business. The maximum first-year deductions prior to the law change were $2,960 for autos and $3,160 for light trucks. The new law increases these amounts by $8,000 to $10,960 and $11,160 for vehicles placed in service in 2008 only.
Congress has also extended some other provisions through 2009 that allow for faster write-offs of qualified leasehold improvements, restaurant properties and retail space, among others. The intent of these provisions is to encourage investment in new property and equipment now, rather than later, in order to stimulate the economy. The generous depreciation deductions certainly help.
Congress has enacted or extended several other provisions through 2009 that assist small businesses:
• Contributions of food to a charity that uses it for the care of the ill, needy or infants, are allowed in excess of the donor’s cost basis of the food.
• Enhanced charitable contribution deductions are also available for donations of books to schools, public libraries and literacy programs and for donations of computer equipment to schools.
• The research credit was extended through 2009, but the alternative simplified research credit is at 12% for 2008 and increases to 14% in 2009.
• The election to expense Brownfield remediation costs rather than capitalizing and depreciating these costs.
• The tax provisions have been greatly simplified here, but the tax rules are anything but simple. You should consult your tax advisor for a thorough explanation and to determine if any of these apply to your business.
Keep in mind that we will have a new president and a new Congress in January, so tax laws may change again. Also with the slumping economy, Congress may enact new stimuli before the end of the year or may extend some or all of the 2008 provisions.
James P. Carney is a partner at Westborough-based CCR LLP in the tax services department. He can be reached at carney@ccrllp.com.
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