MONEY MANAGEMENT

EXPENSING DEDUCTION: BOON FOR SMALL BUSINESS OWNERS

(March 23, 2005) — Small business owners who purchased business equipment or other capital assets that were put into service in 2004 may qualify for a large tax deduction. According to the Virginia Society of CPAs, this is the result of extended tax rules that significantly increase the small business expensing limit.

Depreciation versus expensing

Typically, business property must be depreciated over a number of years because the asset's usefulness to the business extends beyond the year it was purchased. Using the depreciation schedules, it can take many years for small business owners to fully realize the tax deduction.

Under the Section 179 expensing allowance, small businesses that qualify may expense (deduct) up to 100 percent of the cost of most business property in the year it is put into service, rather than recovering the cost through depreciation deductions. The election is made on Form 4562 attached to your original tax return.

Property that may be expensed includes machinery and equipment, such as printing presses or refrigerators, furniture and fixtures, and off-the-shelf computer software. (Off-the-shelf software is software that is readily available for purchase by the general public and has not been substantially modified.) Qualifying property may be new or used.

Expensing limits

Business owners, including those working in a sole proprietorship, partnership or corporation, can choose to expense up to $102,000 of qualified business property on their 2004 tax returns. This is a significant tax break, considering that the 2002 limit was only $24,000. The Jobs and Growth Tax Relief Reconciliation Act of 2003 hiked the expense limit to $100,000, providing for inflation increases. For 2005, business owners can opt to expense up to $105,000 of qualified business equipment costs.

If you acquire and place in service more than one item of qualifying property during 2004, you may allocate the Section 179 deduction among the items in any way, as long as the total deduction is not more than $102,000.

Phase-out rules apply

The maximum annual expensing amount is reduced dollar-for-dollar when the cost of eligible property put into service during the year exceeds $410,000 in 2004 and $420,000 in 2005. If the cost of your Section 179 property placed in service is $512,000 or more in 2004 or $525,000 or more in 2005, you cannot take a Section 179 deduction. These limits are intended to keep the expensing election targeted to small businesses.

Expensing deduction limited for SUVs

Despite the higher expensing allowance mentioned above, taxpayers who purchased or plan to purchase large sports utility vehicles (SUVs) for business use are subject to new limitations.

Under prior law, vehicles weighing more than 6,000 pounds were allowed a first-year depreciation deduction of up to $102,000 when used for business. The 2004 Jobs Act reduces the expensing limit deduction for vehicles weighing not more than 14,000 pounds to $25,000. Now only trucks and vans that have been modified in such a way that it is not likely the vehicle will be used for personal purposes are eligible for the higher deduction amount. This new ruling is effective for SUVs placed in service after Oct. 22, 2004, the date President Bush signed the 2004 Jobs Act into law.

Plan business purchases

Understanding how to maximize the expensing deduction is critical to the successful financial management of a small business. Your CPA can work with you in making the decision to expense rather than depreciate the cost of your business property and explain how and when to use the expensing deduction to make necessary purchases of business property.

The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at www.vscpa.com.