Bonus-depreciation deductions are a thing of the past. But that doesn’t mean you can’t pump up deductions for business assets this year.
Strategy: Take advantage of enhanced provisions. Under the new tax law passed in May, your business can write off more assets faster than before. What’s more, if you buy business assets between now and the end of the year, you can avoid a tax pitfall for purchases in the last calendar quarter.
Here’s the whole story: Under IRC Section 179, you can elect to currently deduct, or “expense,” qualified business assets placed in service during the year. The IRS adjusts the maximum allowance each year.
Initially, the maximum deduction for 2007 was set at $112,000. Good news: The new Small Business and Work Opportunity Tax Act hikes the limit to $125,000. It also extends inflation-indexing of the annual allowance through 2010.
If the total cost of the qualified assets placed in service during the year exceeds an annual threshold, the maximum-deduction allowance is reduced on a dollar-for-dollar basis. The new law increases this threshold for 2007 from $450,000 to $500,000.
Finally, the new small business law extends Sec. 179 write-offs for off-the-shelf software through 2010. Thus, you have a real tax incentive to buy assets before Jan. 1. To maximize the “new and improved” Sec. 179 benefits:
- Show a profit. Remember that the IRS limits the Sec. 179 deduction to your net taxable income from business activities. For example, a cash-basis business might postpone paying bonuses to company officers until January.
- Count taxable income from all business activities. If you have income from another venture, it could increase the allowable amount.
- Step up your business use of a new vehicle. The higher your percentage of business use, the greater your deduction. Example: If you bought a car this year and use it 90% for business, you can deduct 90% of the cost, up to the “luxury car” limit ($3,060 for 2007).
- Start using equipment before Jan. 1. Assets must be “placed in service” in 2007. No deduction is available if the equipment isn’t up-and-running until next year. Note: All you have to do is use the equipment one day in 2007.
Suppose you don’t have enough cash on hand to max out on Sec. 179 benefits for this year. Consider a loan. You can claim the deduction on the entire cost, even if you finance your purchases.