By Barbara E. Weltman | Apr 1, 2004
Tax law changes over the past several years have brought new write-off opportunities for small-business owners. If you haven't already looked, your 2003 return may appear somewhat different because of these new rules. Here are some key changes to which you may be entitled:
- First-year expensing: You can deduct up to $100,000 of the cost of equipment you bought and placed in service in 2003 (up from $24,000 in 2002). This write-off eliminates the need to depreciate the cost of equipment over a number of years. You can use the deduction even if you finance your purchase. And it can be claimed for the purchase of off-the-shelf software.
- Bonus depreciation: If expensing is not elected or if equipment purchases for the year exceed the expensed amount, you can take advantage of a special first-year depreciation allowance called bonus depreciation. The rate for equipment placed in service this year is 50% (up from 30% for property placed in service before May 6, 2003). Note: You aren't required to use the 50% rate; you can opt out of bonus depreciation or simply use the old 30% rate.
- Cars: The dollar limit on write-offs for business cars weighing no more than 6,000 pounds has increased by $7,650 to reflect the higher bonus depreciation. This is in addition to the regular allowance, so that the total dollar limit on depreciating (or expensing) passenger cars that are not electric cars is $10,710. Note: Cars weighing more than 6,000 pounds are not subject to this dollar limit. In effect, the cost of a heavy SUV used 100% for business purchased in 2003 can be deducted in full up to $100,000.
- Health insurance: If you are self-employed (or a partner, LLC member or a more-than-2% S corporation shareholder), you can deduct 100% of your health insurance premiums as an above-the-line deduction (up from 70% in 2002).
- Tax rates: Sole proprietors and owners of pass-through entities may be in for a nice surprise. If you didn't change your estimated tax payments after the April 2003 installment, you may have overpaid your taxes for the year and be owed a refund. The reason: Tax rates were cut in May 2003, retroactive to January 1, 2003. The top rate went down to 35% (from 38.6% in 2002). The other tax rates were reduced to 25%, 28% and 33% (down from 27%, 30% and 35% in 2002). The 10% and 15% rates remained the same, but the 10% bracket was been expanded for most taxpayers and the 15% bracket has been expanded for joint filers, so that more income can fall within these brackets without pushing taxpayers into a higher bracket. What to do: If you're owed a refund, consider filing your return electronically to slash the refund period in half.
For a complete rundown of changes for 2003, see IRS Publication 553, Highlights of 2003 Tax Changes, at www.irs.gov.