This year's congressional session has provided a mixed-bag of results for entrepreneurs.
Good news: tax relief
Small businesses received some good news from Washington on the tax front with the extension of higher first-year expensing limitations for equipment purchases. Currently, businesses that buy up to $108,000 in computers, office furniture, machinery and other equipment can deduct the cost in full if certain conditions are met. This expensing had been set to revert to the old $25,000 limit after 2007.
The Tax Increase Prevention and Reconciliation Act of 2005 extended the higher expensing limit for two additional years, with expiration now set for 2009 instead of 2007. This allows small businesses that buy new or used equipment to deduct the cost immediately instead of depreciating it over five or seven years in most cases. This expensing election can be used even if the cost of equipment is financed in whole or in part.
The expensing deduction cannot be claimed by a company that spends a lot on equipment. For 2006, the full deduction of $108,000 can only be used if purchases do not exceed $430,000. The deduction phases out dollar for dollar because of excess purchases; therefore, no deduction can be claimed this year if equipment purchases top $538,000. The starting phase-out amount ($430,000) had been scheduled to decline to $200,000. The new law extends these phase-out limits (as adjusted annually for inflation) through 2009.
Added break. Businesses don't have to decide at the time of purchase whether to opt for expensing or to claim depreciation. They can wait until they file their returns--or even longer--to make the decision. The new law allows small businesses to make or revoke an expensing election without obtaining IRS consent to do so through 2009 (for any years not closed by the statute of limitations).
Small-business owners may also benefit personally from two other tax breaks in the new law.
- Alternative minimum tax relief (AMT). Individuals can claim higher AMT exemption amounts for 2006 ($62,550 for married couples filing jointly; $42,500 for singles). Without this relief, sole proprietors and owners of pass-through entities (S corporations, partnerships and limited liability companies) could have wound up paying AMT on their share of business income.
- Capital gains extension. The maximum 15% rate on long-term capital gains and qualified dividends had been scheduled to expire at the end of 2008; it has been extended through 2010. This low capital gains rate can benefit owners who are selling their businesses as well as C corporation shareholders who receive dividends from their businesses.
Bad news: association health plans
Many small-business organizations had supported association health plans (AHPs), a concept that would enable them to band together across state lines to offer lower health care premiums to their members. AHPs would have put small businesses on the same footing as major corporations and unions for purposes of health care access.
Despite strong support from the National Federation of Independent Business (NFIB) and other small-business groups, the Senate only had 55 affirmative votes for the Health Insurance Marketplace Modernization and Affordability Act of 2006 (S. 1955); 60 votes were necessary for passage (the House had already approved a similar measure). Opponents, including AARP, feared that federal rules pre-empting state insurance laws under this bill would undermine various patient protection rights in 41 states, such as coverage for supplies for diabetics and testing for cervical cancer.
Many of the more than 46 million uninsured Americans work for small businesses, so some coverage may have been better than none. Small-business groups will continue to press this issue.
No news: expired tax provisions
The new tax law did not address many of the provisions that had expired at the end of 2005 or will expire this year. These include the following important tax breaks for small businesses:
- Employment tax credits (work opportunity credit, welfare-to-work credit and Indian employment credit) that reward companies for hiring certain economically-disadvantaged workers.
- Research credit that rewards businesses for expanding their research and development activities.
- Environmental remediation deduction that allows companies to expense the cost of certain environmental cleanups instead of capitalizing the cost (added it to the basis of property).
- 15-year depreciation for leasehold and restaurant improvements that would otherwise be depreciated over 39 years.
Some or all of these breaks may be included in another tax bill yet to come this year. If and when extensions for these breaks are enacted and for how long they may be is anybody's guess.