Individuals will profit

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By: JIM VANDER SPEK - For the North County Times on June 15, 2003

The new tax law passed this year by Congress is targeted mostly to help individuals rather than businesses.

However, if you own a small business and are profitable, the new law will help a bunch. This is because the profits of most small businesses flow directly to the owners one way or another. In fact, a press release issued by the Treasury Department claims, with typical precision, that "23 million small-business owners will receive tax cuts averaging $2,209" under the new law.

The bulk of the savings accruing to these business owners comes from the drop in the top tax rates. If you are a moderate- to higher-income taxpayer, your federal tax bite will go down somewhere between 5 percent and 8 percent.

The area where businesses are helped directly is in the area of depreciation. When you purchase equipment, you typically are required to depreciate it over the useful life that it is owned. Even if you paid for a piece of equipment in the current year, you need to wait till future years to get some of the deductions.

When you buy less than $200,000 of equipment in a year, you have been allowed to "expense" up to $25,000 of these purchases in the first year. Under the new law, this has been expanded to cover businesses buying up to $400,000 in equipment with a new maximum amount you can expense of $100,000.

If you need even greater deductions, you can take advantage of the expansion in the "bonus depreciation" rules implemented after 9/11. You are now allowed to write off up to 50 percent of property acquired after May 5 right off the top. Even vehicles weighing more than 6,000 pounds get the generous new treatment. That's right. Large sport utility vehicles and other heavy vehicles are treated mostly like other equipment. Lighter vehicles are subjected to punishing restrictions on how fast they can be depreciated. "Off-the-shelf" computer software can also now be completely expensed when purchased.

Not changed are the comical depreciation rates applying to real estate. The law allows a useful life of 27.5 years or 39.5 years, depending on how buildings are used. These strange numbers with decimals have become a permanent part of the code.

What all these new depreciation rules mean is that businesses have even greater flexibility as to how they claim deductions when they purchase new equipment. You must think carefully about the way you choose to depreciate your equipment. One common mistake is to use the default settings that are built into the tax program you or your tax preparer are using, since you could depreciate more or less than the optimum amount depending on your situation now and in future years. If you attempt to depreciate without using a computer, you face a daunting set of computations.

Of course, California is not expected to follow suit with the same, more generous depreciation rules. Since you will be depreciating differently for California and for the Internal Revenue Service, you face a new layer of complication as to your tax planning and record keeping.

Jim Vander Spek is a certified public accountant with offices in Escondido. Contact him at Jimv@vanderspekcpas.com