How can changes in bonus depreciation save a business owner money?
Bonus depreciation allows a business to expense up to the first 50 percent of capital assets — furniture, fixtures, etc. — it purchased. Equipment typically has a seven-year recovery period. For example, if you bought a $10,000 piece of equipment, absent bonus depreciation, you would take first-year depreciation on a seven-year asset. But bonus depreciation allows you to deduct 50 percent of the cost or the first $5,000 in the first year. The second $5,000 would still be depreciated over seven years.
Bonus depreciation differs from Section 179 in that there are no income or placed-in-service limitations, and it can be taken on every qualifying asset. Only tangible property, such as equipment, furniture and fixtures, qualifies for bonus depreciation as opposed to real property, like buildings or land. Only brand-new property qualifies, whereas Section 179 also includes used property.
What tax law changes can benefit business owners on their individual returns?
The most popular is the first-time homebuyer’s credit, which has been expanded and revised. The credit is no longer restricted to first-time homebuyers. Taxpayers who have owned and used the same principal residence for any five consecutive years during an eight-year period are now eligible for a credit of $6,500. New homebuyers, those who have not owned a primary residence in the past three years, still receive the lesser of 10 percent of the purchase price or $8,000. The credit now expires on April 30, 2010, and only homes with a purchase price of $800,000 or less are applicable. In addition, a taxpayer can elect to treat a qualifying home purchase in 2010 as made on Dec. 31, 2009, for purposes of claiming the credit on the 2009 tax return. The modified AGI-based phase-out has been increased to $125,000 for single individuals and $225,000 for joint filers.
Another change is the payroll tax credit that most taxpayers received as a $400 payroll deduction throughout the year. The self-employed should have reduced their quarterly estimates to reflect the credit or will need to claim the credit on their tax return.
What other tax changes apply to individuals?
There are three to be aware of:
- New vehicle sales tax deduction. It applies to the sales tax paid on new cars, motor homes, light trucks and motorcycles purchased after Feb. 16, 2009, up to the amount paid on the first $49,500 of the cost of the vehicle. This can be added to your standard deduction if you do not itemize.
- Energy credits. These apply to energy-saving home improvements, including windows, doors, hot water heaters and air conditioners, that meet IRS guidelines. The credit is 30 percent of the cost, up to a lifetime maximum of $1,500.
- College tuition credits. Starting in 2009, the former Hope credit was replaced by the American Opportunity Tax Credit, which allows a credit of up to $2,500 per year per student. The new credit applies to all four years of school and includes the cost of books. It phases out at AGI of $80,000 singles/$160,000 joint filers. If the credit is more than your tax liability, it is still a refundable credit but only at 40 percent.
David McClain, CPA, MBA, is a manager in the tax department at SS&G Financial Services, Inc. Reach him at (800) 869-1835 or [email protected].
