By John Stylianou, Accountant
The new tax law offers two ways to take faster tax write-offs when you buy equipment for your business.
Expensing increases to $100,000.First, you can now take an immediate tax write-off for up to $100,000 of the cost of business equipment purchased and placed in service this year. Under the old law, the limit for 2003 was $25,000. The advantage of expensing is that you write off the entire cost immediately, instead of deducting it as depreciation expense over several years. The new $100,000 limit will be indexed for inflation in 2004 and 2005.
You’re most likely to benefit from this rule if your business is small or mid-sized. That’s because the expensing amount begins to phase out when your annual equipment purchases reach $400,000. Most tangible personal property used in your business qualifies for the break, whether you buy it new or used. Land, buildings, and certain other kinds of property aren’t eligible.
Bonus depreciation increases to 50%.Under the new tax law, you can also claim higher bonus depreciation on new equipment purchases. Previously you could deduct bonus first-year depreciation of 30% of the equipment cost. For purchases made on or after May 6, 2003, you can claim 50% bonus depreciation. The old 30% bonus applies to purchases made before that date. Eligible equipment includes most new business equipment and certain leasehold improvements.
You’ll need to do some careful planning to achieve the maximum benefit from these two tax provisions. You should first put together your business spending plans for the next two or three years. Then call us so that we can review your situation and make sure you’re maximizing your tax savings.
Lending money to relatives?
Know the tax rules
There are many worthwhile reasons to lend money to a relative. For example, you may want to help a child or sibling continue their education or start their own business.
The IRS says you must charge interest. But lending money to relatives can have tax consequences. The IRS requires that a minimum rate of interest be charged on loans. The rates change every month, and can be found at www.irs.gov. If you do not charge at least the minimum rate, the IRS will still require you to pay tax on the difference between the interest you should have charged and what you actually charged. If these excess amounts become large, or if the loan is forgiven, there may also be gift tax implications.
There are some exceptions. There are some exceptions, though. Loans of up to $10,000 can be made at a lower (or zero) rate of interest, as long as the proceeds aren’t invested. Loans between $10,001 and $100,000 are exempt from the minimum interest requirement as well, as long as the borrower’s investment income is $1,000 or less. If the investment income exceeds $1,000, you’ll be taxed on the lesser of this income or the minimum IRS interest.
Do the paperwork. For the IRS to treat the transaction as a loan and not a gift subject to the gift tax rules, the transaction must look like a loan. The borrower should have the ability to repay the principal and interest. A contract should be prepared which specifies the loan amount, interest rate, the payment dates and amounts, any security or collateral, as well as late fees and steps to be taken if the borrower doesn’t pay. Have the document signed and dated by all the parties.
Can you claim a deduction if you’re not repaid? If the borrower defaults, you may be eligible for a nonbusiness bad debt deduction. However, you must document your efforts to collect the unpaid balance. This may involve the unpleasant task of taking legal action against a family member. The preparation of a signed contract, though, may make the borrower think twice before attempting to evade his or her responsibilities.