Tax Regulations Encourage Small Business Owners

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The ranks of small business owners continue to swell. Many ambitious people are becoming entrepreneurs when they lose their jobs at large corporations because recession forces cutbacks. Others simply seek the psychic rewards of striking out on their own. In either case, one of the surprising rewards comes from the Internal Revenue Service.

Tax regulations encourage small businesses by such devices as the S corporation, in which corporate and individual taxes blend. The business expense deduction for depreciable personal property is one of the less familiar ways the IRS helps small businesses, the editors of Bender's Federal Tax Service point out. The deduction is available to individuals, partnerships and small corporations.

Qualified individuals and small businesses are allowed to take a business expense deduction up to $10,000 per year for depreciable personal property used in the trade or business. The purpose of depreciation is to replace theoriginal investment value of depreciable capital assets.

Under the system now in effect, each item of property is assigned a depreciable life from three to 15 years. For example, if you buy office furniture you can deduct part of the cost each year for seven years. However, if you elect to take a business expense deduction, you would deduct the entire cost of the property in the current year.

You can deduct only $10,000 in any single tax year. However, you can use the expense deduction every year in which you purchase qualifying property.

There are some limitations. Real property or intangibles such as franchises, customer lists and licenses don't count. The property must be acquired by purchase for use in the business. Gifts, inheritances and the like aren't eligible for the deduction.

For purposes of the $10,000 annual limitation, married taxpayers are considered to be one taxpayer. In a partnership or S corporation, a portion of the total is allocated to each partner or shareholder. Each is limited to a $10,000 deduction annually from all sources. Thus, if a partner who is allocated $5,000 from a partnership also places $9,000 of property in service individually, the maximum deduction in that year still is $10,000. …

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