Increase in Section 179 Expensing

Small businesses can take advantage of the election under Section 179 of the tax code to expense the cost of depreciable assets in the year of acquisition, within tax law limits.

Under Section 179, a taxpayer may elect to deduct, up to a dollar limit ($25,000, under pre-2003 Act law), the cost of qualifying property placed in service during the tax year. The dollar amount is phased out dollar-for-dollar as the taxpayer’s cost of qualifying property for the year exceeds $200,000. The amount that can be expensed each year cannot exceed the taxpayer’s taxable income derived from the active conduct of a trade or business for the year (without taking into account the effect of Section 179). Thus, the expensing election is most beneficial to profitable smaller businesses with sufficiently small annual capital investments.

Property qualifying for the election must generally be tangible personal property, like equipment, vehicles, machinery, etc. Under pre-2003 Act law, off-the-shelf computer software did not qualify.

The 2003 Act increases the maximum dollar amount that may be deducted under Section 179 to $100,000 for property placed in service in tax years beginning in 2003, 2004, and 2005. In addition, for phaseout purposes, the $200,000 annual investment limit described above rises to $400,000 for property placed in service during those years. The dollar limits will be indexed for annual inflation for tax years beginning after 2003 and before 2006. And off-the-shelf computer software qualifies for the Section 179 election, for tax years beginning in 2003, 2004, and 2005. After tax years that begin in 2005, the expensing election rules go back to the way they were prior to the 2003 Act.

The increased Section 179 election and the newly expanded additional first-year depreciation bonus can be a powerful combination when it comes to writing off new asset purchases, especially given the significantly higher Section 179 annual asset investment limit. The rules can be tricky, however, so the advice of a professional tax advisor is recommended.

Corporate Estimated Taxes

In general, corporations are required to make quarterly estimated tax payments of their federal income-tax liability. For a corporation whose taxable year is the calendar year, these estimated tax payments must be made by April 15, June 15, September 15, and December 15.

Part of the political battle over the 2003 Act was caused by the desire of some in Congress to limit the “cost” of the law to $350 billion. In order to fit the 2003 Act into that framework, the new law takes 25% of the corporate estimated tax payment payable by September 15, 2003 (which falls in the 2003 U.S. government fiscal year) and makes it payable by October 1, 2003 (which falls in the 2004 U.S. government fiscal year).