The New Tax Law ? Here?s how it will help your small biz
By Michael Banner
The Bush tax law may have been passed but has it or will it positively help your small business? The answer is a resounding YES! Let?s look at some of the specific areas of the new tax law and exactly how your small biz benefit.
Customers have more money! As more and more Americans start receiving their increased child tax credits and experiencing the effect of a lower tax withholding, small biz owners will start to notice increases in sales. This is basic supply side economics and the core of the Bush tax plan. The best part is that it works. The only question is, ?How Much?? Dissenters of the tax plan argue there will be little benefit to anyone except the very wealthy. This is far from the truth.
Using an example from CCH, a leading provider of tax and business law information and software, a married couple with two children under age 17 with an adjusted gross income of $50,000 will pay about 42 percent less federal income tax. This couple would have been in the 27% tax bracket but now are in the 15% tax bracket. Don?t tell me this family won?t have more money to spend!
The law does also cut the top four income tax brackets to 25 percent, 28 percent, 33 percent, and 35 percent, effective January 1, 2003. The top brackets had been 27 percent, 30 percent, 35 percent, and 38.6 percent. These reductions were enacted as part of the 2001 tax law, but were not scheduled to be phased in fully until 2006.
Rich or poor, more Americans WILL be spending more money this year and next at businesses such as yours! However, there are other more direct ways that your business will benefit from the new tax law.
The $100,000 Deduction
How would you like to take up to $100,000 in deductions right off your business net income? One of the best benefits of the new tax law allows small businesses to expense equipment purchases up to $100,000 in the year of purchase. Rather than depreciating a capital purchase over 3 to 20 years, Section 179 allows deduction of the cost of the equipment purchased in 2003 or later (change is scheduled to end in 2006). The new law increases the ceiling from $25,000 to $100,000. Additionally, the definition of equipment was expanded to include items such as ?shrink wrapped? software.
Deductions for larger equipment purchases are reduced by the amount of equipment total (installed) over $400,000. So if you installed $450,000 of equipment purchased in the same taxable year, you would only get a $50,000 Section 179 deduction ($450,000 less $400,000 limit).
Capital Gains Decrease
With the new law, long-term capital gains taxes have been reduced from a maximum of 20% to 15%. Capital gains taxes are assessed on profits from the sale of capital assets (i.e. real estate, stocks, etc.) that have been held for on e year or more. For instance, if you own a small business and sell it on or after May 6, 2003 for $1,000,000 profit, you will pay $150,000 in capital gains tax or 25% less taxes on the gain (assuming ownership of 12 months or more).
Buy a Truck & Deduct up to $7650
If you purchase new equipment (i.e. computers, cars, etc.) or make leasehold improvements this year to your office you are allowed to write off 50% (up from 30%) rather than depreciating the property 5 to 39 years. For instance, if you buy a new $30,000 server, you can write off $15,000 immediately and depreciate the balance using normal depreciation rules. This ?bonus depreciation? for automobiles is limited to $7650 (from $4600). New rules apply for all property purchased after May 5, 2003.
Standard Mileage Rate Increased (business)
Individuals and businesses that use a car or truck for business purposes can take a deduction, based on mileage used for business, of 36-1/2 cents per mile for 2002. The optional standard mileage rate for the cost of operating a car, van, panel truck, or pickup has been increased from 34-1/2 cents per mile in 2001. As in previous years, you can only take the standard deduction or the cost (depreciation and expenses) of usage of the vehicle NOT both.
In the past, Congress taxed dividends as ordinary income, so the maximum tax was 38.5%. The new tax law lowers the maximum tax on dividends to 15 percent retroactive to Jan. 1 of this year. For investors in the 10 percent and 15 percent tax brackets, the tax on dividends will be just 5 percent.
Some high-income earners may be able to utilize the current tax law change to effect a 5% reduction on $50,000 worth of income. Here?s how it would work: A high-income earner can form a C Corporation which receives income from the owners? other business (i.e. a contract to perform services). The first $50,000 in net income is subject to a corporate tax rate of 15%. The total earnings can then be paid out as a dividend to the shareholder (owner), who would pay, under the new rules, only 15% personal tax. This would be a reduction of 5% in the net tax rate from the high-income earners? personal tax rate maximum of 35% (again under the new rules).
New Credit for Qualified Retirement Savings Contributions
Employees or self-employed taxpayers who make contributions to 401(k), IRA or certain other retirement plans can receive credit of 10% to 50% of the taxpayer?s total contributions (up to $2000), based on adjusted gross income. This new credit may be claimed by taxpayers whose modified adjusted gross income isn?t over $50,000 (if married and filing a joint return), $37,500 (heads of household) or $25,000 for all others. New Form 8880 will compute this credit.
Net Operating Losses Carryback Period Extended
Businesses losses incurred in 2002 may be carried back to offset taxes from the last five years of returns (as opposed to two years under previous law). Tax offsets may result in refunds of taxes paid in any of those five years.
Self-Employed Health Insurance Deduction Increased to 70%
Self-employed business owners (includes Sub S corporate owners) who pay for health-related insurance. The self-employed health insurance deduction is increased to a maximum of 70% of health insurance expenses.
OTHER CHANGES YOU MIGHT LIKE
· IRA Deduction Increased to $3000 ($3500 for persons 50 or older) from $2000
· IRA Deduction Phase-Out Increased by $1,000 for 2002 - If you are covered by a retirement plan at work you can take an IRA deduction if your modified adjusted gross income is less than $64,000 (married filing joint) or $44,000 (single or head of household).
· Coverdell education savings accounts contribution increased to $2,000 from $500
· New Tuition Deduction ? Qualified students may now deduct up to $3,000 in expenses for tuition and fees (for college or other post-secondary education), regardless of whether deductions are itemized (subject to income qualification).
· Foreign Earned Income Exclusion Increased ? Individuals who earn income in foreign countries can make $80,000 in 2002 (up from $78,000) without paying income taxes.
· Maximum Adoption Credit Increased to $10,000 for families incurring adoption expenses. The maximum adoption credit and the maximum exclusion for employer-provided adoption benefits have been increased to $10,000, up from $5,000 in 2001. Further, the income phase-out range has been increased to run from $150,000 to $190,000.
2003 TAX-RATE SCHEDULE
10% - $7000 or less
15% - $7000 to $28,400
25% - $28,401 to $68,800
28% - $68,801 to $143,500
33% - $143,501 to $311,950
35% - $311,951 and above
Married Filing Jointly
10% - $14,000 or less
15% - $14,001 to $56,800
25% - $56,801 to $114,650
28% - $114,651 to $174,700
33% - $174,701 to $311,950
35% - $311,951 and above
A Little Late Night Reading
If you would like a copy of the new tax law, it can be download free from the U.S. Government Printing Office?s Web at www.gpoaccess.gov.
Or for those that want to cut to the chase and read a summary, here are a few others:
As always, we recommend that you consult your tax professional before making business decisions based on the new tax law.