Both changes in the tax law were enacted in hopes of spurring capital spending after the September 11 attacks. The result: Small businesses have a lot more flexibility in choosing how much depreciation to take and when to take it, says Chuck Burgess, a CPA with Brookwood Tax Service in Atlanta. "You can literally pick the amount you want to deduct and use a combination of write-offs to reach it," he says.
Weinstock, the owner of New York-based Fuel Digital, a photo retouching company with $11 million in sales, purchased $200,000 of computer equipment in 2003. Using a so-called Section 179 deduction, he was able to write off half of that as depreciation. Section 179 can be applied to almost any capital expense -- new or used equipment, a building, or office furniture. The maximum write-off under this rule is now $102,000, but it sinks to a paltry $25,000 for 2006.
Weinstock next took advantage of bonus depreciation, which expires at the end of this year. Bonus depreciation applies to equipment with a life expectancy of 20 years or less. It allows 50% first-year depreciation -- in Weinstock's case, $50,000. Finally, Weinstock followed standard depreciation tables, writing off 20% more, or $10,000. His grand total: $160,000 in deductions, compared with just $40,000 using standard depreciation tables.
Be aware that gorging on deductions now may backfire later. If your income is low this year, but you anticipate being in a higher tax bracket next year, "you might reconsider taking the deductions" immediately, says Ross Rizzo, director of tax at accounting firm Salibello & Broder LLP in New York.
These tactics will also make your company look less profitable -- something to bear in mind if you plan to apply for a loan. William Pollack, president of Optimation Technology, a $7 million Rochester (N.Y.) engineering company, is sticking to the standard tables. "I wanted to make my books look a little brighter for the banks," he says. That means they look a little brighter to Uncle Sam, too -- at least this year.
Corrections and Clarifications
"Brilliant Deduction" (Summer 2004) stated that buildings can qualify for tax deductions under Section 179 of the federal tax code. The Internal Revenue Service guidelines say that, with some exceptions for agricultural structures and certain research and storage facilities, real estate does not qualify for the deduction.
By Karen Cheney