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Special Report
June 2003
Small Business Tax Cut
Reap the benefits for IT purchases and off-the-shelf software
For small businesses, buying new technology just got less taxing- literally.
A new $350 million tax-relief package, signed by President Bush in May, quadruples the amount of new equipment- including technology equipment and off-the-shelf software- small businesses can expense from $25,000 per year to $100,000. In addition, businesses can deduct another 50 percent in new equipment depreciation, up from the previous 30 percent.
The new tax-cut bill, which offers a raft of benefits for small businesses, is meant to give the anemic U.S. economy a much-needed boost.
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The new tax deduction allows for up to $100,000 in equipment expenses- called Section 179 Expensing- and remains in effect through 2005. It also applies retroactively to purchases made on or after January 1, 2003. Any small business that spends less than $400,000 in new equipment each year qualifies for the deduction. The law covers office furniture, heavy SUVs or trucks, computer equipment and off-the-shelf software. In addition bonus depreciation jumps to 50% for property acquired after May 5, 2003 and before January 1, 2005. |
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For CDW customer and Phoenix business owner Mark Trengove, the new tax law hit at the right time. In January, Trengove started up a video post-production company called Blade Editorial, which edits film, commercials and corporate projects.
"Starting a business, I'm so worried about cash flow and making payroll- anything that helps the bottom line is really important, says Trengove. "The accountant told me we could deduct a lot of the equipment."
Trengove borrowed money and outfitted the six-person company with nearly $400,000 of video-editing equipment, videotape machines, computers and software. Under Section 179 Expensing in the May 2003 tax bill, Trengove can receive federal tax deductions for those expenses, even though the purchases were made prior to the passage of the new bill.
Small Businesses and the Economy
Small businesses, such as Blade Editorial, contribute to the health of the U.S. economy in a big way. According to a recent study by the U.S. Small Business Administration, the 23 million small businesses across the country make up 98 percent of all employers, hires about half of the private sector workforce and are responsible for the majority of new jobs.
Small businesses worldwide spent an estimated $31.7 billion on IT services in 2002, according to New York consulting firm Access Market International (AMI) Partners. Those purchases include tech gear, such as personal computers (PCs) and notebooks, printers, servers and off-the-shelf software- expenses which the business can deduct under the Job & Growth Tax Relief Reconciliation Act of 2003.
Michael Kross, a partner at tax consulting firm BDO Siedman in San Francisco, expects many small businesses to take advantage of the new tax breaks.
"This helps small businesses that are profitable and want to expand their capital expenditures. If they make them now, they get that increased tax benefit," says Kross, whose firm is just beginning to explain the new tax law to its small business clients. "Capital expenditures is the weakest part of the economy, and the new tax benefits target that weakness."
What The Tax Cuts Mean
In effect through the end of the 2005 calendar year, Section 179 Expensing is retroactive to purchases made on or after January 1,2003. Any small business that spends less than $400,000 in new equipment each year qualifies for the tax deduction, limited to $100,000. The previous law allowed for $25,000 in expenses with a phase out cap of $200,000 on expenditures.
The law, which covers computer equipment, office furniture and heavy SUVs or trucks, now allows businesses to expense off-the-shelf software. The previous law didn't allow expensing of off-the-shelf software, Kross adds.
The additional 50 percent in immediate deductions is called a "bonus 50 percent depreciation." In tax terms, depreciation is the cost of using an asset over time and it's considered an expense. Typically, businesses write off depreciation of assets in five to seven-year increments.
The new bonus depreciation allows small businesses to immediately expense their equipment purchases by 50 percent in the first year they purchase the products.
Benefit Scenario
For example, if a company acquires $200,000 in new technology equipment on May 15,2003, half of it or $100,000, can be deducted under the new tax law for equipment purchases, Kross said. With the remaining $100,000 in expenditures, the business can deduct half of it the same year with the bonus 50 percent depreciation. The remaining $50,000 in new equipment can be deducted over the next several years through the normal depreciation schedule, he said.
Example:
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Section 179 expense |
$100,000.00 |
Special Bonus Depreciation
($200,000-100,000=100,000 x 50%) |
50,000.00 |
MACRS depreciation
(100,000-50,000= 50,000 x 20%)(HY,200%,DB) |
10,000.00 |
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Total first year depreciation |
$160,000.00 |
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The government initially instituted a 30 percent bonus depreciation after the Sept. 11 terrorist attacks in hopes of spurring economic growth. The new bonus depreciation is in effect for purchases after May 5, 2003 to Jan. 1, 2005.
Mark Luscombe, a tax analyst with Riverwoods, Ill.-based CCH Inc., believes it's too soon to know whether all the benefits to small businesses will give the economy the shot in the arm it needs. As for the new equipment-purchasing tax law, those with a need to update their IT equipment now, the government believes its provided an incentive, he says.
"If you need to buy equipment to grow," says Luscombe, "the new deductions will reduce the amount of income that they would have had to pay taxes on."
For Leslie Bocskor, chief executive officer of ModeEleven, reducing tax load is enabling the start-up to upgrade its technology infrastructure this year. Thanks to the new tax law, Bocskor says, the company can now afford to buy- rather than lease- its equipment.
"With these new tax breaks, I've shifted in a new direction. Buying is better than leasing," Bockskor says. "When we talk to our investors, the new tax law will make it easier for us to justify the investments in hardware. They will see it will affect the bottom line positively by increasing our assets. And it's going to take less money off our coffers at the end of the year."
The company, which makes screensaver software needs to purchase new servers and to spruce up its trade show booth with new laptops, LCD screens and plasma TV screens.
For ModeEleven, the new tax law is doing exactly as the government hoped- enabling a small business to invest in new technology to accelerate growth. "When you're delaying your purchases trying to make every dollar work, it slows everything down," Bockskor explains. "This allows us to move quicker."
Tax Cut Checklist
1) Do you qualify as a small business? To fully qualify under Section 179, total capital expenditure must not exceed $400,000. The cap is $500,000 in capital expenses annually but the full set of deductions doesn't apply.
2) What are the depreciation requirements? To qualify as a capital expense the purchase must have a useful life of over one year, but business owners can immediately expense the depreciation in the first year.
3) What types of purchases apply? Most IT purchases apply under the tax-deduction provision, but purchases such as air conditioners or heating equipment, property used predominately outside of the U.S., lodgings and property used by tax-exempt organizations do not apply.
4) When does it end? Take advantage of the provisions before they expire. The tax break of $100,000 ends in 2005 and bonus of 50% ends after 2004.
* For all issues related to taxation, consult your tax specialist
for full ramifications regarding your business.
For more information, please contact your
CDW account manager at 800.840.4239.
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