If you are a business owner and you are considering purchasing new business equipment, now is the time to act! With the passing of the Economic Stimulus Act by Congress, business owners have been granted a tax break for purchasing new equipment in 2008.
Most of us have heard of the bonus tax refunds that have been approved through the passing of the Economic Stimulus Act. However, these are just a portion of the act. You may not know that there are components of the act that benefit business owners. One portion of this deals with the purchasing of new business equipment. Let's face it, as a business owner of any kind, there is almost a continual need for new or improved equipment to help our business perform better. Unfortunately, many times we put off these purchases for financial reasons. Now you can purchase the new equipment and receive a tax break for doing it. The Economic Stimulus Act states that any business owner who purchases and puts into use new equipment in 2008, will receive a bonus 50% depreciation on that equipment on their 2008 taxes! This could mean significant tax savings for your business! The government has implemented this program to try to entice business owners into making their equipment purchases now in order to help stimulate the economy. The tax savings are available for any business equipment purchase that will be depreciated on your 2008 taxes. It is applicable to any type of business as well.
What types of equipment qualify? Any type that is used directly for your business, to benefit your business, and that will be depreciable on your 2008 taxes. If you are unsure if certain equipment will qualify, consult your tax professional for advice. Let's look at a couple of examples of business types and the type of equipment that may apply. We'll start small, with a home daycare provider. Child care providers need equipment unique to their business, such as play equipment, appliances, and computer equipment. As a child care provider, if you purchase equipment that will be in use long term, then you will probably depreciate that equipment on your taxes. So, if you purchase a new swing set, a new refrigerator, or a new computer, you can collect the additional 50% tax savings when you depreciate these items. While these are a large outlay of cash now, it is worth it to make the purchase now to receive the tax benefits. Looking at a computer consulting company, they may need to purchase a new server, new office furniture, or new laptops for the consultants. Again, these purchases will be depreciated on the 2008 taxes, so they will qualify for the additional tax credit. Finally, let's look at a physician's office. Physicians often need to purchase the latest technology to offer their patients the best care possible. Many times this equipment is very expensive. By purchasing this equipment in 2008, at least they will qualify for the additional 50% depreciation on the equipment.
Since this tax benefit is only available for equipment purchases made and put into use in the year 2008, now is the time to buy. It may be hard to part with that money up front, but if you know you are going to need the equipment eventually anyway, it is worth it to make the purchase this year and benefit from the tax savings.
Saturday, May 3, 2008
Business For Your Son Or Daughter
First, how not to go about it:
A cash loan is not the way to go.
Neither is signing as surety for a bank loan
A gift of the amount required? Again, not the best approach
But these are the three most common but wrong ways by which parents try to help their children get started in business.
So what is the best way?
For US residents and citizens, Internal Revenue Code 1244 provides the answer.
If you give your daughter $50,000 say to start a new venture, and the business goes belly up with the loss of the $50,000, there is no way that the IRS will allow you to claim this loss as a deduction.
Or suppose you loan her business $50,000. Again, if things do not work out, the business will keep paying you the interest until it runs out of cash, leaving you with a worthless note.
Tax-wise, you have a capital loss, which is deductible at the pitiful rate of only $3,000 per year against your ordinary income. Or you can use the loss to offset capital gains.
The same sad tax fate, a capital loss, results if you sign as surety and must pay Sue's $50,000 loan from the bank.
Tax-wise, a gift to your daughter is even worse. The $50,000 is hers. As a result, the tax loss is hers, not yours. Under the circumstances, chances are that Sue has little or no income, and the loss is almost totally wasted.
Note too that a loan or a bank surety is often questioned by the IRS. Why? The IRS contends that the $50,000 was a gift because you never intended to try to collect in the first place. You had no reasonable expectation of being repaid is the way the IRS puts it.
But now let’s look at IRS Section 1244 – the right way.
Section 1244 allows you to claim an immediate deduction for a loss on stock in a small business corporation. Your loss is fully deductible against ordinary income, rather than a limited capital loss.
And you can claim a maximum Section 1244 loss of $100,000 (joint return) in a single year or $50,000 on a single return
The maximum amount you can claim as a Section 1244 loss in a single year is $100,000 on a joint return or $50,000 on a single return.
So instead of a gift, a loan or a bank surety, you and your daughter set up a corporation for her new business. You get $50,000 of stock in the corporation that qualifies for Section 1244 treatment. Your daughter, who runs the business, draws a salary
If the business succeeds, your daughter can gradually buy back your stock (or, better yet, you can gift it to her) over time. Any profit you make on the buyback will be a low-taxed capital gain.
A cash loan is not the way to go.
Neither is signing as surety for a bank loan
A gift of the amount required? Again, not the best approach
But these are the three most common but wrong ways by which parents try to help their children get started in business.
So what is the best way?
For US residents and citizens, Internal Revenue Code 1244 provides the answer.
If you give your daughter $50,000 say to start a new venture, and the business goes belly up with the loss of the $50,000, there is no way that the IRS will allow you to claim this loss as a deduction.
Or suppose you loan her business $50,000. Again, if things do not work out, the business will keep paying you the interest until it runs out of cash, leaving you with a worthless note.
Tax-wise, you have a capital loss, which is deductible at the pitiful rate of only $3,000 per year against your ordinary income. Or you can use the loss to offset capital gains.
The same sad tax fate, a capital loss, results if you sign as surety and must pay Sue's $50,000 loan from the bank.
Tax-wise, a gift to your daughter is even worse. The $50,000 is hers. As a result, the tax loss is hers, not yours. Under the circumstances, chances are that Sue has little or no income, and the loss is almost totally wasted.
Note too that a loan or a bank surety is often questioned by the IRS. Why? The IRS contends that the $50,000 was a gift because you never intended to try to collect in the first place. You had no reasonable expectation of being repaid is the way the IRS puts it.
But now let’s look at IRS Section 1244 – the right way.
Section 1244 allows you to claim an immediate deduction for a loss on stock in a small business corporation. Your loss is fully deductible against ordinary income, rather than a limited capital loss.
And you can claim a maximum Section 1244 loss of $100,000 (joint return) in a single year or $50,000 on a single return
The maximum amount you can claim as a Section 1244 loss in a single year is $100,000 on a joint return or $50,000 on a single return.
So instead of a gift, a loan or a bank surety, you and your daughter set up a corporation for her new business. You get $50,000 of stock in the corporation that qualifies for Section 1244 treatment. Your daughter, who runs the business, draws a salary
If the business succeeds, your daughter can gradually buy back your stock (or, better yet, you can gift it to her) over time. Any profit you make on the buyback will be a low-taxed capital gain.
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