Tax Tips for Business Owners

In a tightening economic climate, smart business owners take advantage of all opportunities. Here are a few you might not be aware of, courtesy of the IRS.

Hiring? Consider taking advantage of the Work Opportunity Tax Credit
Designed to provide an incentive to hire from certain groups that have a particularly high unemployment rate (including urban youths, government assistance recipients, ex-convicts, veterans and vocational rehabilitation referrals), the Work Opportunity Tax Credit has been extended a number of times. Now it's combined with the welfare-to-work tax credit and extended through Aug. 31, 2011. 

The combined credit is available for employers hiring from one or more of nine targeted groups. Depending on the group and the circumstances, the maximum credit per employee ranges from $1,200 for qualified summer youth employees to $5,000 for long-term family assistance recipients.

Own real estate? You might benefit from cost segregation
Real estate holdings represent a significant capital investment. Cost segregation carves out shorter-lived assets (qualifying for five-, seven- or 15-year write-off periods) normally imbedded in a building's construction or acquisition costs and thus depreciated over 39 years. Reclassifying assets and accelerating depreciation could bring tax savings and easier write-offs when items become obsolete. Reclassifying assets is most effective for property valued at $1 million or more.

Considering buying equipment? Enhanced Section 179 expensing might help
The Economic Stimulus Act of 2008 has two incentives for businesses that purchase "tangible personal property" for use in the business. The first is enhanced Section 179 expensing. For property placed in use in during the 2008 tax year, businesses can deduct up to $250,000. The deduction begins to phase out if the business spends more than $800,000.  Before the Act, the Section 179 expensing limit was up to $128,000, with a phase out beginning at $510,000.

What property qualifies? Generally, the property must be newly purchased tangible personal property actively used in the business and for which a depreciation deduction would be allowed. It must be used more than 50 percent for business. 

Need another incentive to purchase equipment? Bonus depreciation is back
The second incentive in the Economic Stimulus Act is bonus depreciation. This incentive was used after 9/11 and after the gulf coast hurricanes to encourage businesses to invest. The new law provides qualifying taxpayers 50% first-year bonus depreciation of the adjusted basis of qualifying property. 

To claim bonus depreciation, the assets must be new, qualified property put into service after Dec. 31, 2007. Qualified property must be:

  • property with a depreciation recovery period of 20 years of less
  • depreciable computer software that's not amortizable over 15 years
  • water utility property
  • qualified leasehold improvement property.

What about leasing?
If purchasing your equipment isn't practical, leasing has tax advantages too. If you lease your equipment, you are allowed a full write-off of lease expenses each year, no matter the size of your business or the dollar value of the leases.

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