We've got six tax-saving moves that can slash thousands of dollars off your 2004 tax bill. But you need to move fast.
Attention small business owners: Now is not the time to get distracted by the holiday chaos. Time is rapidly running out on your chance to make some savvy tax-saving moves that could slash thousands of dollars off your 2004 small business tax bill.
So drop the fruitcake and listen up. To take advantage of the generous tax breaks detailed below, you need to take action before the ball drops in Times Square.
1. Load-Up on Equipment and Software
As you probably know, most small businesses are eligible for the "Section 179 deduction." For tax years beginning in 2004, this valuable break allows you to immediately deduct up to $102,000 worth of business equipment as long as it's up and running by year end. That equipment can be new or pre-owned. Business software costs also qualify.
Keep in mind, this is a use-it-or-lose-it deal. You can't roll over any unused Section 179 allowance from this year to next. So the more you spend by year end on business equipment and software, the more you'll save on taxes. However, you need not get too carried away here. Why? Because you'll start off on January 1, 2005, with a brand-new $105,000 Section 179 allowance — thanks to the annual inflation adjustment. (This assumes your business uses the calendar year for tax purposes.)
2. Buy a Heavy SUV
Your business might not be big enough to justify spending $102,000 on equipment and software. If so, consider buying a new "heavy" SUV before year end to soak up some or all of your leftover Section 179 allowance. By heavy, I mean an SUV with a gross vehicle weight rating (GVWR) above 6,000 pounds.
Now, you've probably heard that the recently passed American Jobs Creation Act of 2004 imposed a $25,000 limit on Section 179 deductions for heavy SUVs. True. This restriction applies to SUVs put to business use after October 22, 2004. But it's still a great deal. Why? Because the tax law allows you to claim all the following writeoffs on your 2004 return: (1) a $25,000 Section 179 deduction, (2) 50% first-year bonus depreciation on the SUV's remaining depreciable cost, and (3) regular first-year depreciation on the cost left after the first two deductions.
For example, say you spend $60,000 on a new Cadillac Escalade that will be used 100% in your business. As long as you make the purchase before the year's over and use the new vehicle for business before then, you can generally claim the following deductions on your business's 2004 federal return: the $25,000 Section 179 deduction plus $17,500 of bonus depreciation (50% x ($60,000 - $25,000)) plus another $3,500 of regular depreciation. These first-year deductions add up to a whopping $46,000, or about 77% of your new Escalade's cost, all in Year One. Not too shabby.
After this year, however, things won't be quite so sweet, because the 50% bonus depreciation break expires at year end. That makes buying a new heavy SUV next year a less-attractive proposition than buying one this year.
3. Better Yet: Buy a Heavy Non-SUV
Here's some really good news: The full $102,000 Section 179 deduction is still available for heavy business vehicles (those with GVWRs above 6,000 pounds) that are not considered to be SUVs under the tax law. Both new and used vehicles can qualify for this important exception. Non-SUVs include:
- Vehicles with a cargo area of at least six feet in interior length that's not easily accessible directly from the passenger compartment. Many pickups with full-size beds will fit this description. Beware: some "quad cab" and "extended cab" pickups might have cargo beds that are too short to qualify.
- Vehicles designed to seat more than nine passengers behind the driver's seat. Many hotel shuttle vans will fit this description.
- Vehicles with: (1) a fully enclosed driver's compartment and cargo area, (2) no seating behind the driver's seat, and (3) no body section protruding more than 30 inches ahead of the leading edge of the windshield. This sounds pretty weird, but many delivery vans will meet this description.
Bottom Line: Heavy vehicles that fall under these three exceptions remain eligible for the full Section 179 instant writeoff of $102,000 for tax years beginning in 2004.
4. Hurry to Cash In on 50% First-Year Bonus Depreciation
Your business is also entitled to claim 50% first-year bonus depreciation for new (not used) equipment placed in service by Dec. 31. New real estate land improvements (sidewalks, drainage systems, and so forth) and some leasehold improvement and restaurant building costs also qualify. Ditto for business software costs. For assets that are also eligible for the Section 179 deduction, the 50% bonus depreciation writeoff is based on the cost remaining after the Section 179 deduction. Any cost remaining after the claiming both the Section 179 and 50% bonus deductions must be depreciated over a number of years under the normal tax rules.
Here's the rub: The valuable 50% first-year bonus depreciation break expires on Dec. 31. So you might want to buy some more stuff and get it up and running before the end of the year to lock in extra first-year depreciation deductions before it's too late.
|Beware Depreciation Restrictions|
|Here are some important rules to keep in mind as you consider making year-end purchases of depreciable assets for tax reasons.
You can claim depreciation deductions only for the business-use percentage of an asset's cost. For example, if you use a vehicle 80% for business and 20% for personal purposes, you can depreciate only 80% of the cost.
The Section 179 deduction cannot exceed your business's taxable income (calculated before the Section 179 writeoff). For 2004, the deduction is phased out if your business acquires more than $410,000 worth of assets that would otherwise qualify for the Section 179 writeoff.
When a heavy SUV, pickup, or van is owned by your corporation, it must be used more than 50% for actual corporate business activities (based on mileage) to qualify for the Section 179 writeoff. Unfortunately, personal use by an employee who is also a more-than-5% shareholder (this means you) doesn't count as corporate business use for this purpose, even though the personal-use value must be reported as additional taxable compensation on your Form W-2. The same restriction holds true for other corporate employees who are related to a more-than-5% shareholder. When the over-50% business-use test is failed, your corporation must depreciate the vehicle using the straight-line method (in which case it will take six years to write off the cost completely).
The 50% first-year bonus depreciation break is available only for new (not pre-owned) assets that are placed in service by Dec. 31 and used more than 50% for business.
5. Set Up Your Tax-Favored Retirement Plan Now
Recent tax law changes have given small-business owners better retirement plan options than ever before. But to reap these rewards, you generally must set up a plan before year end. Here's a breakdown of your best options:
- Establish a simplified employee pension (SEP) plan and potentially contribute and deduct up to $41,000 for the 2004 tax year. Actually, you can do this after yearend, because a SEP can be opened up as late as the extended due date of your 2004 return. You can make your contribution as late as that date and still claim a 2004 tax deduction. But why procrastinate?
- For a one-person business, establish a solo 401(k) plan. This arrangement may allow you to contribute and deduct considerably more than other types of plans (potentially up to $44,000 if you'll be 50 or older as of year end). However, to claim any deduction on your 2004 return, you must establish the plan by Dec. 31 (assuming your business uses the calendar year for tax purposes). You can defer part of the actual contribution until the extended due date of your 2004 return.
- Set up a defined benefit pension plan and potentially contribute and deduct even more. The exact amount depends on various factors, including your age and earnings. Defined benefit plans generally work best for high earners age 50 and older. To claim a deduction on your 2004 return, you must establish the plan by Dec. 31 (assuming your business uses the calendar year for tax purposes). You can defer the actual contribution until the extended due date of your 2004 return.
Beware: If your business has other employees, you might have to make contributions to their accounts as well as your own. In this case, please consult a retirement-plan pro before taking any action.
6. Juggle Year-End Income and Expenses for Tax-Saving Results
Most small businesses operate as pass-through entities (meaning S corporations, partnerships, and LLCs). These outfits pass their business income and deduction items through to their individual owners, who then report them on their personal 1040s. Most small businesses also use the cash method of accounting for tax purposes.
If that sounds like your situation, and you expect to be in the same or lower tax bracket next year, it's a smart move to defer taxable income into 2005 and accelerate deductible expenditures. Here are some suggestions on how to do that:
- Charge deductible business expenses on credit cards before year end. That way, you'll create 2004 tax writeoffs even though the actual credit-card bills won't be paid until 2005. Beware: this taxpayer-friendly rule doesn't apply to store revolving charge accounts. So if you charge expenses on your Home Depot credit card, you can't claim any deductions until you actually pay the bill.
- Cut checks before year end to pay other deductible expenses. You can claim 2004 deductions even though the checks might not be cashed or deposited until early next year. To fail-safe your writeoffs against an IRS challenge, send large year-end checks via registered or certified mail. That proves you shipped the checks off this year.
- On the income side of the equation, consider deferring some of your billings until right at the end of the year. That way, you'll be paid — and taxed — next year instead of this year. Of course, you should never defer billings when there's any chance that would decrease the odds of collecting your money.
Small Business Tax Planning Info. for 2005
|2005 Federal Income Tax Rates and Brackets for Individuals|
|10% tax bracket||$0-7,300||$0-14,600||$0-10,450|
|Beginning of 15% bracket||7,301||14,601||10,451|
|Beginning of 25% bracket||29,701||59,401||39,801|
|Beginning of 28% bracket||71,951||119,951||102,801|
|Beginning of 33% bracket||150,151||182,801||166,451|
|Beginning of 35% bracket||326,451||326,451||326,451|
|* Head of household
Note: If you run your business as a C corporation, the federal income tax rates and brackets are the same as for 2004.
|2005 Retirement Account Contribution Limits|
|Maximum deductible solo 401(k) to business owner's account||$42,000|
|Maximum deductible solo 401(k) contribution if owner is 50 or older||$46,000|
|Maximum deductible SEP account contribution||$42,000|
|Maximum profit-sharing Keogh account contribution||$42,000|
|Maximum SIMPLE IRA salary deferral contribution||$10,000|
|Maximum SIMPLE contribution if age 50 or older||$12,000|
|Other Important 2005 Tax Planning Figures|
|Maximum Section 179 instant depreciation writeoff||$105,000*|
|Cap on Social Security tax (based on wages or self-employment income)||$90,000|
|Allowance for business mileage||40.5 cents per mile|
|* For tax years beginning in 2005.|