Tax Act Spells Relief for Small Business: Take Advantage of New Tax Regulations for Businesses and Individuals While They Last

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The Jobs and Growth Tax Relief Reconciliation Act of 2003--"JGTRRA" for short--will result in tax cuts of about $330 billion, a portion of which is aimed at small businesses like frame shops and galleries. Officially, the tax cuts are spread out over the next 10 years, but the reality is that they come heavily front-loaded. Most of the breaks are in the first two to five years, and then there are built-in "sunset" provisions for each, which causes the breaks to expire or revert to their pre-JGTRRA levels.

But if the provisions are extended beyond the terms in the legislation--which many experts think will happen--the total tax cut could reach more than $800 billion. Many Republican legislators are committed to doing just that. Senator Kay Bailey Hutchison (R-Texas) said, "We hope to not 'sunset' these tax cuts, but instead to allow them to go forward."

Politics aside, the reductions in individual tax rates will help millions of small businesses that pay taxes at the individual rate, but the biggest business-related tax cuts involve an increase in the small business expensing election limit and an increase in the allowable bonus depreciation percentage.

The act increases a business' ability to deduct most types of capital expenditures for the years 2003 to 2005. In those tax years, a business can deduct expenses up to $100,000 per year. The previous limit was $25,000 per year. During the same time period, small businesses may expense off-the-shelf computer software. Finally, business owners can make use of a bonus depreciation of 50 percent on qualifying equipment bought between May 5, 2003, and January 1, 2005. (For more information on capital deductions, see IRS Publication 946: How To Depreciate Property or Form 4562: Depreciation and Amortization, which is downloadable at www.IRS.gov).

The bottom line is that JGTRRA makes this a great time to make major investments in your business. For example, in 2003, for a sole proprietor in the 28-percent tax bracket, the net cost of making a $100,000 purchase is just $72,000. Capital expenses above $100,000 would then be depreciated like any other type of capital asset.

According to IRS Publication 946, eligible expenditures include tangible property used for manufacturing, production, transportation, communications or furnishing electricity, gas, water or sewage disposal. Examples of eligible expenses for frame shops are machinery, equipment, counters and signage. …