Even the IRS Is in a Giving Mood

Recent tax changes are saving entrepreneurial outfits plenty. Here's a 10-point checklist to make sure no deduction goes unfiled

By Karen E. Klein

We all know that Santa comes down the chimney Dec. 25, but this year, the jolly old gent will need to work overtime if he hopes to stuff more delights into entrepreneurs' stockings than the Bush Administration jammed into its tax-reform package. Be warned, however: Unlike Kris Kringle's largesse, this gift from Washington has a limited shelf life. The increased "Section 179" deduction, which allows businesses to deduct up to $100,000 in new-equipment purchases in 2003, will expire in 2005.

Could the enhanced deduction, up from its former $25,000, be the impetus your outfit needs to upgrade those ancient, steam-powered computers cluttering the office? Plenty of business owners apparently think so, if soaring sales PC sales are any indication. Still, taking delivery of your new hard- and software represents only part of Section 179's potential to lower tax bills. To gain the maximum advantage, keep in mind these tips, which were compiled by the experts at Hewlett-Packard (HPQ ) and H&R Block (HRB ):

1. Replace your older technology. Even allowing for the tax break, small-business owners stand to realize still more savings, because PC prices have dropped more than 40% since 2000. Costs for software and other high-tech equipment -- printers, servers, and the like -- aren't far behind.

2. Depreciate computers and electronic equipment. Personal computers and other digital devices, like PDAs, scanners and copiers, may be eligible for a limited depreciation deduction if also used for business purposes. Ask your accountant about depreciation, which can be tricky to compute, or see IRS Publication 946 for details. The publication, which includes a discussion of the Section 179 deduction, is available online in .pdf format. If you have not claimed depreciation deductions to which you were entitled in prior years, they may qualify for "catch-up" depreciation on your current return.

3. Tap your PC's full tax-saving potential. While using your PC for bookkeeping and other small-business needs, make sure you have a system in place that tracks how much you use the technology. Depreciation can be limited if you use equipment for business purposes less than 50% of the time.

4. Look into bonus depreciation. Certain capital assets acquired after May 5, 2003, and before Jan. 1, 2005, may be eligible for a 50% depreciation bonus in the first year you use them. The bonus, which applies to most equipment, machinery, technology, and office furniture.

5. Take advantage of special lease programs. If your outfit lacks the cash to purchase expensive technology or other equipment, consider leasing. Not only does leasing allow you to expense equipment -- rather than depreciating it, as you would with a purchased asset -- it can multiply a budget by a factor of three. For example, a business could lease 30 PCs for the cost of buying 10.

6. Take security precautions. Avoid being the latest victim of identity theft. Make sure your PC and its security software are up to date. If you file your tax return online, be absolutely certain that you are not storing personal financial data on an inadequately secured PC. (For more on identity theft, see BW Online, 12/11/03, "Your New Weapon vs. ID Theft")

7. Recycle. When upgrading technology, be aware that many states offer tax credits for recycling equipment. Make an environmentally responsible choice by using a computer-recycling service and applying the credit to your return. Most major computer vendors also offer recycling programs.

8. Donate your PC to charity Help others -- and help yourself to a nice tax deduction at the same time.

9. Check your eligibility for the R&D credit. You may be able to take a 20% credit for the cost of technology research intended aimed at developing better business components and systems.

10. Paying family members. If your spouse or other family member works for you, pay an appropriate wage and deduct it as a business expense. Your teenager may be the perfect IT specialist for your company -- and wages paid to a child under 18 are not subject to FICA or Medicare taxes.

Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

Before it's here, it's on the Bloomberg Terminal.