New York Times via NewsEdge, October 2, 2008
Given the economic climate,
small-business owners may be loath to make major purchases of new equipment or
furnishings this year. But for those businesses with money and an inclination to
spend it, now is a good time to buy because the U.S. Congress enacted generous
tax incentives for use in 2008 only. Businesses considering major expenditures
may realize significant tax savings if they act promptly.
The Economic Stimulus Act
of 2008 allows businesses to take an immediate write-off of up to
$250,000 for equipment purchased during 2008, double the amount allowed
in 2007. Businesses that place the assets in service this year are
entitled to an additional 50 percent depreciation.
Sidney Kess, a New York tax
lawyer and certified public accountant, gave this example: ''Say a small
business bought $600,000 worth of equipment and placed it in service --
it could write off the $250,000, and half the remaining $350,000. That's
a total first-year write-off of $425,000. The remaining $175,000 would
have to be depreciated. If it's seven-year equipment, that would mean
writing off $25,000 a year over the next seven years.''
Under the tax code,
seven-year equipment includes office furniture and fixtures, safes,
refrigerators and dishwashers and certain manufacturing machinery.
Depreciation periods can vary, based on the equipment involved.
Computers and copiers, for example, are given a five-year depreciation
period.
Julian Block, a tax lawyer
in Larchmont, N.Y., pointed out that a taxpayer must have earned income
to claim the equipment write-offs, but that any earned income, not just
that from the business, will suffice.
As an example, he noted the
case of a person who lost his job recently and decided to open a
restaurant. The cost of equipment and furnishings exceeds the income he
expects the restaurant to earn this year, but because he received a
salary for several months and because his wife is employed, as joint
filers they will be able to write off the restaurant equipment against
that income, too.
The immediate write-off and
resulting tax savings could give many businesses a welcome cash-flow
advantage during a tough economic period. Of course, many businesses are
too small to make such big purchases or simply do not have the need. But
tax professionals say other fourth-quarter opportunities for tax savings
are available.
Barbara Weltman, a tax
lawyer in Millwood, N.Y., and author of ''J. K. Lasser's Small Business
Taxes,'' said that even the smallest businesses may need to buy a car,
truck or van, and the stimulus act grants a special first-year
depreciation allowance for business vehicles in 2008. For cars it is
$10,960; for trucks and vans, it rises to $11,160.
Both limits are $8,000
higher than the previous first-year depreciation limit. As a result,
many businesses that had once thought it better to lease vehicles may
now want to consider buying them, she said.
Other recent laws may also
provide tax breaks for certain small businesses, Ms. Weltman said. Under
the military tax bill enacted in June, small businesses that employ and
continue to pay National Guard and Reserve members who are called to
active duty may be able to claim a tax credit of up to $4,000 per
eligible employee.
The Housing and Economic
Recovery Act of 2008 provides a tax credit of up to $7,500 for
first-time homebuyers with income of up to $75,000 for single filers and
$150,000 for couples filing jointly. A partial credit is available to
those with up to $20,000 more in income. This could benefit people who
have a cramped home office in a rental apartment and are considering
buying a home or apartment at today's depressed prices, she said.
A credit reduces taxes
dollar for dollar, making it more valuable than a deduction, which
simply reduces taxable income. This credit may be claimed on home
purchases after April 9 of this year and before July 1, 2009, but
taxpayers should be aware that the credit must be repaid, starting
within two years, at a rate of up to $500 annually for 15 years. The
home must be the buyer's principal residence.
Contributing to a
tax-deferred retirement plan is always one of the best ways to reduce
taxes in the year of the contribution while laying the foundation for a
secure future.
Avery E. Neumark, a partner
in the New York accounting firm Rosen Seymour Shapss Martin & Company,
says he is advising owners of small businesses to set up 401(k)
retirement plans if they have not already done so.
Federal law does not
require businesses to offer retirement plans to employees, but it
forbids those that offer plans from discriminating in favor of top
executives. Consequently, many small businesses, especially those that
employ large numbers of unskilled workers, have traditionally shunned
sponsoring plans, fearing their expense.
The appeal of a 401(k) is
that workers, as well as the owners, pay for their own retirement
contributions through salary deferrals. Participants may defer up to
$15,500 this year, and those 50 or older may defer an additional $5,000.
''If the company wants to match contributions or not, it's their
choice,'' Mr. Neumark said.
Mr. Neumark added that a
solo practitioner or a business with only a few professional employees
might want a defined-benefit plan and a profit-sharing plan, as well as
a 401(k), because those individuals can put away far greater amounts,
something that appeals especially to people approaching retirement age.
For example, a 50-year-old earning $225,000 might put $175,000 into a
defined benefit plan, $20,500 into a 401(k) plan and $13,500 into a 6
percent profit-sharing plan for a total of $209,000.
With the economy in
turmoil, no one can predict what will happen with tax policy next year.
Still, with the potential for tax increases, many professionals favor
action this year to take advantage of low rates on capital gains and
most dividends.
Mr. Kess, the New York
lawyer and accountant, advised closely held incorporated businesses that
are in a position to pay a dividend to do so before the end of the year.
If some of the company's stock is owned by family members like children
or elderly parents who are in the 10 or 15 percent bracket, they will
owe no tax on the dividends.
The current long-term
capital gains tax rate of 15 percent might also make it advantageous to
sell a business now, Ms. Weltman said.
