Writing Off Small Business Equipment Fast – A Change for 2005

Some tax changes are made to stimulate investment in the economy by giving small business owners incentives to spend more. And in some years the incentives are more generous than in others. The authoritative J.K. Lasser’s Your Income Tax 2005 explains how it works for the individual SBO’s 2004 return and 2005 planning.

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Prime example: take “bonus depreciation.” When you do your taxes for 2004, you’ll see that the incentives that year had more bang for the buck than this year. More bang as in, 2004 was the last year to take it. If you elect when you file your 2004 return (and stay tuned for whether that’s a good idea), you can hype your depreciation rate – how fast you write off investment in eligible new property – by a whopping 50% of cost on top of the depreciation you could otherwise take in the first year of use. (Eligible new property means just about any equipment that you bought and put in service in 2004, plus some computer software and leasehold improvements. Very large wooden horses might count if used in a business venture or takeover; however, there are no specific IRS guidelines for ancient mercenaries.)

The bonus depreciation option is gone for 2005. Act now on your 2004 return, or look at the opportunity as history.

How does this affect you as a small business owner?

• First off, don’t despair about 2005. There is an even faster write-off than “bonus depreciation”, and it isn’t changing. That’s like, “Yes Virginia, there is a Santa Claus.” Tax planners call it “first-year expensing” and the IRS calls it the “Section 179 deduction.” Whatever you call it, you get to write off not 50% but 100%, of the cost of the equipment in the first year of use. To the extent that you qualify for this, you can forget about bonus depreciation.
   
• First-year expensing only works for small business. If you buy qualifying property (tangible personal property like machinery, computers, office equipment and vehicles, maybe Trojan horses) with a cost of less than $410,000, you can elect to immediately write-off up to $102,000 of the cost. The excess cost is subject to depreciation over time (including bonus depreciation for 2004). If you buy from $410,000 to $512,000 of qualifying equipment, first-year expensing is phased down -- to zero at $512,000.
   
• A crucial point: Don’t assume that you should always write off purchases as fast as possible. For example, a new business generating start-up losses might do better spreading depreciation over future years by not electing either bonus depreciation in ’04 or first-year expensing. The same thinking might apply to shifting income to tax years with a relatively lower tax rate, perhaps because of the effects of alternative minimum tax in particular years.

This is just an overview. There are lots of bells and whistles on depreciation, expensing, income shifting and every other dimension of tax planning for you to read about in J.K. Lasser’s Your Income Tax 2005.

For further information, to request a review copy of J.K. Lasser’s Your Income Tax 2005 or to schedule an interview with J.K. Lasser spokesperson, tax attorney Donna LeValley, please contact:

Nancy Colson
Managing Director
The Alternative: Media Placement Specialists
212-246-1580/
ncolson@nyc.rr.com

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