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New Tax Law Turns Small Biz Loophole Into A Crater
by Wayne M. Davies

In case you were too busy last year to notice, our beloved politicians passed another tax bill designed to put more dollars in your pocket.

President Bush signed the new tax law on May 28, 2003 -- and there is truly something for everyone in this package, a veritable smorgasbord of tax savings.

If you are a Small Business Owner or Self-Employed Person, there's one especially lucrative tax break.

It's actually an expansion of a tax rule that's been on the books for years. Known as the Section 179 deduction, the new legislation takes this loophole and turns it into a deduction big enough to drive a fleet of SUV's through.

The Section 179 deduction enables the Small Business Owner to deduct 100% of the cost of most business equipment, in lieu of depreciation over several years.

What's so great about that?

Think about it like this: I've got a dollar and I'd like to give it to you. You have two choices -- I give it to you now, or I give it to you 5 years from now.

Which do you prefer?

Obviously, you'd rather have it now, right?

And why is that?

Because of what you learned way back in Finance 101: something your banker calls "the time value of money."

I'll spare you a boring textbook definition. Instead, let's just assume we agree on this simple point: Is a dollar worth more today or 6 years from today?

It's worth more today.

And that's why the Section 179 deduction is so valuable.


Let's use an example to bring all this financial theory into reality.

You buy $5,000 worth of office equipment in 2003. Under normal depreciation rules, you wouldn't get to take a deduction for $5,000 in 2003. Instead, you'd write off the $5,000 over 6 years -- part in 2003, part in 2004, etc.

If you're in the 35% tax bracket, you get your $1,750 in tax savings over 6 years. Yawn. That's a long time!

You'd get your deduction, and the resulting tax savings, but you'd have to wait 6 years to realize all the benefits.

Section 179 says that if you meet certain requirements, you can deduct the full $5,000 in 2003. You reduce your taxes by $1,750 in Year 2003.

So let me repeat my rhetorical question: Uncle Sam has $1,750 he'd like to give you. When do you want it? All at once, or spread out over 6 years?

That's the beauty of Section 179.

But you have to meet certain requirements to benefit from Section 179. One requirement concerns the total amount of equipment you can deduct rather than depreciate. In 2009, the amount was $24,000. And for 2003, the amount was originally set at $25,000.

Then Congress and the President passed the new tax bill in May 2003 that raised that amount to a whopping $100,000.

Never liked depreciation? Well, you can pretty much kiss it good-bye now. If your business buys more than $100,000 of equipment in a single year, it ain't so "small" any more! So this new law should cover all small businesses.

Be sure to consult with your tax professional to get the scoop on all the Section 179 rules.

A very nice deduction just got expanded to monstrous proportions! Take advantage of it.

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Copyright 2004 Wayne M. Davies Inc.

Wayne M. Davies is author of the best-selling ebook, "The Tax Reduction Toolkit: 29 Little-Known Legal Loopholes That Will Reduce Your Taxes By Thousands" (For Small Business Owners and Self-Employed People Only!)

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