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Collect big tax savings from first-year depreciation …

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in Small Business Tax,Small Business Tax Deduction Strategies

Thanks to the recent Bush tax acts, you can deduct on your 2003 tax return either 30 percent or 50 percent of the cost of qualifying new assets that you bought and placed in service last year. The remaining amount is then depreciated using standard tax rules.

Specifically, the 30 percent first-year "bonus" depreciation break applies to most new, non-real-estate business assets that you acquired before May 6, 2003. Software also qualifies for this tax break, as do most leasehold improvement costs in buildings more than three years old. (This is an exception to the general rule that real estate assets are ineligible for most bonus depreciation.)

The more generous 50 percent bonus depreciation break applies to the same kinds of new (not used) assets that you acquired on or after May 6, 2003.

Even better, most small businesses are entitled to immediately deduct up to $100,000 of new and used personal property assets (primarily equipment, machinery, furniture and fixtures and software) under the Section 179 deduction privilege. The $100,000 limit applies to tax years beginning in 2003. (For tax years beginning in 2002, the allowance is only $24,000.)

Advice: If you claim both the Section 179 deduction and the bonus depreciation (either 30 percent or 50 percent) for the same piece of equipment, you should claim the Section 179 deduction first. Take this deduction on Form 4562, Depreciation and Amortization.

Next, calculate the appropriate bonus depreciation deduction using the cost that remains after the Section 179 write-off.

Finally, after taking those two souped-up deductions, calculate the standard depreciation deduction on the remaining costs. Be sure to identify all assets qualifying for the Section 179 and bonus depreciation breaks by carefully reading the instructions to Form 4562.

Tax strategy for 2004: Make hay while the sun shines. Those sweet bonus depreciation deals will expire at the end of 2004 unless Congress takes action. That makes 2004 a great year to add new business equipment, software, furniture, fixtures and leasehold improvements.

Final tip: Thanks to an inflation adjustment, the Section 179 allowance for 2004 rises to an even-more-generous $102,000.

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