14. A Tax Tip for Small-Business Owners

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If you acquired some new equipment in 2004, don't forget about the much improved depreciation write-off.

Attention small-business owners: As you prepare your business tax forms and schedules, don't forget to take advantage of the enhanced first-year depreciation write-offs for assets bought and used during calendar year 2004. Thanks to laws passed in 2002 and 2003, these tax treats are tastier than ever. Here's a review:

You can immediately deduct 50% of the cost of qualifying new assets (which generally is equipment, including "heavy" vehicles) acquired and placed in service during calendar year 2004. You then depreciate the remaining 50% according to the standard tax rules that have been around for years.

Specifically, the 50% first-year bonus depreciation break applies to new (not pre-owned) assets with a tax depreciation life of 20 years or less that were acquired during 2004. Most non-real-estate assets, including purchased software, meet this description. So do most leasehold improvements in buildings that were more than three years old when you made the improvements.

However, you may not have to worry about bonus depreciation. Why? Because most small businesses are entitled to something even better: the privilege of immediately deducting up to $102,000 of new and used personal-property assets (meaning equipment, machinery, furniture, fixtures and software) under the "Section 179 deduction." This generous $100,000 Section 179 allowance applies to tax years beginning in 2004. (As explained below, a special rule applies to "heavy" SUVs.)

If you can claim both the Section 179 deduction and 50% bonus depreciation for the same new asset, take the Section 179 deduction first. Next, calculate your rightful bonus depreciation deduction using the cost remaining after the Section 179 write-off. Finally, calculate your standard depreciation write-off using the cost remaining after subtracting the Section 179 and bonus depreciation deductions.

You do all these things by filling out Form 4562 (Depreciation and Amortization) in the proper fashion. You then file Form 4562 along with your other business tax forms and schedules.

Beware of Reduced Section 179 Break for "Heavy" SUVs Placed in Service After 10/22/04
The American Jobs Creation Act of 2004 placed a reduced $25,000 limit on Section 179 deductions for "heavy" SUVs with gross vehicle weight ratings (GVWRs) between 6,001 and 14,000 pounds. However, heavy SUVs that were placed in service during 2004 before 10/23/04 are blissfully unaffected by this anti-taxpayer law change. So those vehicles remain eligible for the full Section 179 deduction (up to $102,000 for tax years beginning in 2004).

Importantly, the $25,000 limitation also doesn't affect vehicles that are not considered to be SUVs under the tax law. For this purpose, "non-SUVs" are defined as vehicles that meet any of the following descriptions.

  • Vehicles equipped with a cargo area that is not readily accessible directly from the passenger compartment and that is at least six feet in interior length. The cargo area can be open or designed to be open but enclosed by a cap. For example, many pickups with full-size cargo beds will qualify.
  • Vehicles with: (1) an integral enclosure that fully encloses the driver's compartment and load carrying device, (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. For example, many delivery vans will qualify.
  • Vehicles designed to seat more than nine passengers behind the driver's seat. For example, many hotel shuttle vans and minibuses will qualify.

In summary, vehicles with GVWRs above 6,000 pounds that meet any of the preceding descriptions are still eligible for the full Section 179 deduction of $102,000 for tax years beginning in 2004, even if they were placed in service after 10/22/04.