Year-End Tax Tips for Small Businesses: Part I

Attention small-business owners: It's not too late to slash your business’s 2008 taxes. If your outfit can afford new equipment and software, now is a great time to go shopping and take advantage of this year's favorable tax depreciation rules.

In part one of our two-part series on year-end tax moves, we'll tell you which purchases can deliver the most tax-saving bang for the buck.

While it may not be politically correct to buy a big SUV, doing so can deliver serious tax savings. Specifically, buying a new or preowned “heavy” SUV and using it more than 50% for business for the rest of the year (based on mileage) qualifies you for a first-year Section 179 depreciation write-off of up to $25,000. You can then write off the rest of the cost under the general tax depreciation rules.

To collect the $25,000 deduction, the SUV must have a manufacturer’s gross vehicle weight rating (GVWR) of more than 6,000 pounds. You can usually find a vehicle’s GVWR specification on a label on the inside edge of the driver’s side door.

Example: Say your small business uses the calendar year for tax purposes. Before the end of 2008, you buy a new $65,000 Cadillac Escalade and use it 100% for business for the remainder of the year. On your 2008 business tax return or form, you can claim the $25,000 Section 179 deduction. Then you can write off another $20,000 under the 50% first-year bonus depreciation break explained later [($65,000 - $25,000) x 0.5 = $20,000]. Finally, you can generally write off another $4,000 under the normal tax depreciation rules [($65,000 - $25,000 -$20,000) x 0.2 = $4,000]. Your first-year depreciation deductions add up to $49,000, which is a whopping 75% of the vehicle’s cost.

A larger $250,000 first-year Section 179 deduction allowance is available for new and used business equipment and software put to use in tax years beginning in 2008. Computer systems, office furniture, machinery, and almost all software costs qualify. The $250,000 deduction privilege is also allowed for heavy pickups and vans (those with GVWRs above 6,000 pounds) that are not classified as SUVs under the tax law. These include:

* Pickups with a cargo area that is at least six feet in interior length. Many pickups with full-size cargo beds will qualify, but some “quad cabs” and “extended cabs” with shorter beds may not.

* Closed load-carrying vehicles with no seating behind the driver’s seat and no body section protruding more than 30 inches ahead of the leading edge of the windshield. Many delivery vans fit this description.

* Vehicles designed to seat more than nine passengers behind the driver’s seat, such as shuttle vans and minibuses.

Your business can also claim 50% first-year bonus depreciation for qualifying new equipment and software placed in service by Dec. 31, 2008. Real estate land improvements (sidewalks, drainage systems and so forth) and certain leasehold improvements also qualify (most other real estate costs do not).

For a new asset that’s also eligible for the Section 179 depreciation write-off, the 50% bonus depreciation deduction is based on the cost remaining after the Section 179 deduction. Any cost remaining after subtracting both the Section 179 and 50% bonus depreciation deductions is depreciated under the normal tax rules.

Note: The Dec. 31, 2008, deadline for 50% first-year bonus depreciation applies whether your business’s tax year is based on the calendar year or not.

Example: During 2008, your business buys new equipment costing $350,000. On this year’s business tax return or form, you can generally write off the first $250,000 under the Section 179 deduction privilege. Then you can write off another $50,000 under the 50% bonus depreciation deal [($350,000 - $250,000) x 0.5 = $50,000]. Finally, you can generally deduct another $10,000 under the normal depreciation rules [($350,000 - $250,000 -$50,000) x 0.2 = $10,000]. Your first-year depreciation deductions add up to $310,000, which is an impressive 89% of the equipment cost.

Be aware that all of the first-year depreciation breaks explained here might be eliminated or seriously cut back next year.

The $25,000 Section 179 deduction for heavy SUVs could be repealed because environmentally-conscious Democrats in Congress hate gas guzzlers. However, given the dire condition of the nation’s auto industry, this break might be left on the books to encourage sales.

The $250,000 Section 179 deduction is scheduled to drop back to only $133,000 for tax years beginning in 2009. However, the $250,000 allowance might be extended as part of an upcoming economic stimulus package.

Finally, the 50% first-year bonus depreciation break is scheduled to expire at the end this year. However, it too could be extended as a stimulus measure.

Before making any major expenditures for tax-saving reasons, please huddle with your tax pro. The breaks covered in this article come with some fine print and limitations that may be relevant to your situation.

Note: If you run your business as a C corporation, the 2008 federal income tax rates and brackets are the same as for prior years, and they are currently scheduled to be the same for 2009 as well.

Maximum deductible solo 401(k) contribution to business owner’s account: $46,000

Maximum deductible solo 401(k) contribution to age-50-or-over business owner’s account: $51,000

Maximum deductible SEP account contribution: $46,000

Maximum profit-sharing Keogh account contribution: $46,000

Maximum SIMPLE IRA salary deferral contribution: $10,500

Maximum SIMPLE contribution if age 50 or older: $13,000

Maximum deductible solo 401(k) contribution to business owner’s account: $49,000

Maximum deductible solo 401(k) contribution to age-50-or-over business owner’s account: $54,500

Maximum deductible SEP account contribution: $49,000

Maximum profit-sharing Keogh account contribution: $49,000

Maximum SIMPLE IRA salary deferral contribution: $11,500

Maximum SIMPLE contribution if age 50 or older: $14,000

Maximum first-year Section 179 depreciation write-off $250,000*

Cap on Social Security tax (based on wages or self-employment income) $102,000

Allowance for business mileage:
January-June: 50.5 cents per mile
July-December: 58.5 cents per mile

* For tax years beginning in 2008.

Maximum first-year Section 179 depreciation write-off : $133,000*

Cap on Social Security tax (based on wages or self-employment income): $106,800

Allowance for business mileage: 55 cents per mile

* For tax years beginning in 2009.