Tax time is here for small businesses. In the difficult economy of 2009, many who lost jobs to the recession have made the move into small business and many who have operated successful small businesses for years suffered through a lean year.
Therefore, knowing the tax breaks available to small businesses for 2009 is more essential than ever so that valuable cash can be saved. Following are five tax breaks small businesses can’t afford to miss on their 2009 tax returns.
1. Deducting startup expenses. Market research for a new business and getting it started can be expensive propositions. If you started a business in 2009 and incurred expenses in the process, you need to know the rules for deducting business startup expenses. The normal rule allows you to amortize the startup costs over a period of at least 5 years. But a special rule allows a first-year deduction of up to $5,000 of startup costs if you amortize the remainder over a 15-year period. You can crunch the numbers and see which option makes sense for your particular situation.
2. Writing off assets in the first year. The Section 179 deduction allows for special first-year expensing of up to $250,000 of the cost of machinery, equipment, vehicles, furniture and other qualifying depreciable property placed in service in 2009. Instead of writing-off the cost of assets through depreciation deductions over several years, this provision allows the immediate write-off of qualifying assets. After 2009, the deduction will again be limited to a much lower amount–$133,000.
In addition, special depreciation rules are in effect for 2009 as well. The 2009 Recovery Act extended the special first-year 50-percent depreciation allowance, known as bonus depreciation.
This provision allows small businesses the option to deduct half the cost of qualifying property in the first year it is placed into service, and then depreciate the equipment in the usual fashion. After 2009, this option is scheduled for repeal. Bonus depreciation can be claimed in conjunction with Section 179 special expensing so that you can obtain the benefit of both tax breaks.
A small business must make a decision whether using bonus depreciation or first-year expensing is worthwhile for its 2009 tax return. It depends on:
- its level of income earned for 2009
- its marginal tax rate, and
- its assumption on what marginal tax rate it will be subjected to in later years.
Be aware that you can use both Section 179 expensing and bonus depreciation with respect to the purchase of new business vehicles, but additional special new business vehicle depreciation rules apply.
The current uncertainty about tax rates beyond 2009 makes this decision even more difficult. There is also a risk of a later “recapture” of the tax benefits if the assets are sold too soon after the purchase. One thing is certain, though–your Section 179 expense and bonus depreciation deductions cannot exceed the net amount of income you would otherwise have for the year. It cannot result in the creation of a net operating loss for the year.