Congress softened the bite of higher wages with a raft of tax deductions for small biz that take effect this year
Workers earning the federal minimum wage enjoyed a boost from $5.15 to $5.85 an hour on July 24, the first of three annual hikes that will bring the rate to $7.25 in 2009. But along with the raise, Congress passed a package of $4.8 billion in tax breaks for small businesses that go into effect this year. While employers in 30 states and the District of Columbia won't be hit directly in the first year of the raise because state laws already mandate wages higher than the new federal rate, those businesses can still take advantage of the new tax breaks.
The biggest boon for most small-business owners is an expanded deduction for new purchases. Any firm making purchases of pretty much anything from livestock to software, real estate excluded, can take advantage of this so-called Section 179 deduction. The new law allows business owners to deduct $125,000 in purchases, up from $112,000. Only businesses that spend less than $500,000 on eligible equipment—a ceiling that was raised from $450,000—can qualify. Spend above $500,000 and the size of the deduction starts to shrink.
Some tax experts caution that it may be better not to take the entire write-off immediately and instead deduct the cost of depreciation in future years. "If I've got a company that's growing, I might not want to take all the deductions in the first year, when they have little to no income. I might want to wait a couple of years until I'm in the higher brackets," says Craig Forbes, tax manager with Hascal, Sjoholm & Co, P.S., an accounting firm in Everett, Wash.
A Nod to the Restaurant Industry
The new law extends the Section 179 deduction another year, but after 2010 the amount is set to return to the 2002 $25,000 limit. And for companies in the Gulf Opportunity Zone affected by Hurricane Katrina, the incentives are even greater through 2008: up to a $225,000 write-off, with an investment ceiling of $600,000. Knowing when such tax breaks are set to expire can help small-business owners plan their purchases. "This might be the year you want to get all new copiers, computers for your employees, new furniture, off-the-shelf software," says Jackie Perlman, senior tax research coordinator with H&R Block (HRB).
The new tax package includes other provisions meant to offset the cost of rising wages to small-business owners. In a nod to the restaurant industry, the new law preserves the tax credit that businesses get for their Social Security payments on workers' tips. For the purposes of calculating the so-called "tip credit," the minimum wage will remain at $5.15 an hour. Restaurants get a tax credit for their Social Security contributions beyond that.
"Employers were presumed to be paying Social Security on a minimum wage, and then above that amount they would get credit for any Social Security taxes they paid," says Paul Gada, senior tax analyst at accounting firm CCH's Business Owner's Toolkit in Riverwoods, Ill. "For that industry, the increase isn't going to be as painful as it could be."
The tax legislation contains a mix of other changes as well. One expands incentives to hire employees from some economically disadvantaged groups, such as certain veterans, people on public assistance, and people released from prison. Another does away with the law that automatically considered ventures that are jointly owned by married couples to be partnerships. That allows the owners to file as sole proprietors, a much simpler return than filing as a partnership. "This is not so much a money-saving as I think it is a headache-saving provision," says Perlman.