11/ 06/ 2007
by Jeffrey Moses
Invest now so you can deduct later
Year-end tax savings break down to a rather simple formula: defer as much income as possible to the coming year, while making as many purchases as possible in the current year. Making the most of this formula, however, requires constant tax awareness. Financial gurus point out that taxes should not be thought of as a one-time event, but rather an ongoing, year-long event. Issues you will need to consider include business income and purchases, buying and selling of investments, taking distributions of retirement funds and stock options, etc. Each of these should be discussed throughout the year with tax and investment advisors.
One of the most obvious no-brainers for small-business owners is to purchase office equipment and furniture near the end of the calendar year rather than waiting until the following year. When doing so, the purchase often can be expensed when taxes are paid in April. (This assumes that your fiscal year is the normal calendar year.) This means that if you're in the 25 percent tax bracket, for example, you can effectively reduce the cost of your purchase by 25 percent within just a few months.
Section 179 of the tax code states that you can entirely write off most business equipment/furniture in the year that you put the equipment into service rather than depreciating it over a longer period as in the past. You don't even need to pay for the equipment entirely during the year you buy it. You can still deduct it if you purchase the equipment on credit, put it into use during the current year and pay for part or all of it during the upcoming year or years.
For a complete list of what are and what are not eligible purchases, refer to IRS Publication 946, Electing the Section 179 Deduction. Generally included are computers/software, telephones, telephone systems, copiers, faxes, office furniture and property acquired for business purposes (i.e., not investment property). Consult with your tax advisor to determine eligibility. You must use the equipment, furniture or structures at least 50 percent of the time for business purposes—and you need to keep records of time-use if you use it for personal purposes as well.
The maximum Section-179 deduction for 2007 is $125,000, increasing to $128,000 for 2008. The amount deducted cannot exceed your taxable income for the year, but you can carry the deduction to future years if your purchases exceed your 2007 taxable income. The total limit of equipment/furniture bought during the year is $500,000. If your purchases exceed this, you must deduct the amount over $500,000 from the maximum allowable 179 deduction. Thus, if you bought $550,000 in eligible equipment, you would need to deduct $50,000 from your $125,000 179-deduction for the year. This means you would be able to take only $75,000 in 179 deductions ($125,000 - $50,000 = $75,000).
If you have a C-corporation, an LLC, an S-corporation or a partnership, you may be able to utilize a Section-179 deduction in both your business entity's taxes and your personal income taxes. Important note: Many states allow smaller deductions, so be sure to consult your tax advisor to take maximum benefit of the Section-179 deduction, both federal and state.
Section-179 deductions for various types of ownership can be complex, so consult with your tax advisor early in the year to avoid a year-end flurry of decisions.
