Small Business Expensing & Depreciation
The new expensing provision increases the amount of equipment purchases a small business can immediately expense, rather than depreciate over time, from $25,000 to $100,000. This is something that the Office of Advocacy and the small business community have long sought. Moreover, the threshold for phasing out expensing is raised to $400,000 - twice the old amount. Each of these numbers will be indexed to inflation beginning with 2004; however, as it currently stands, these provisions will expire after December 31, 2005.
The Administration estimated earlier this year that at least a half million businesses would directly benefit from the expensing provision changes similar to those enacted. Using 1999 tax data, sixty-nine percent of businesses claiming this deduction were sole proprietors and individual farmers (almost 2.9 million business filers). Furthermore, expensing changes also have the advantage of simplifying the process of capital investment.
The additional first-year bonus depreciation deduction has also been increased from 30 to 50 percent for investments acquired and placed in service after May 5, 2003 and before January 1, 2005. Some investment qualifies for a one-year extension to December 31, 2005.
These provisions should provide needed incentives for small businesses to purchase capital equipment. Private investment adjusted for inflation, after rising steadily throughout the 1990s, has remained stagnant for the past two years. The National Federation of Independent Business's (NFIB's) monthly surveys have suggested a similar trend on the part of small business owners regarding their capital spending patterns.
Accelerating the Tax Cuts
The new budget would accelerate most of the tax cuts enacted in 2001 to take effect this year; the top tax rate would fall from 38.6 to 35 percent. Since most small businesses are sole proprietorships that file using the owner's individual returns, these tax cuts have direct effects on small firms. According to the U.S. Treasury, these effects are:
- For the 23 million U. S. small business owners who benefit from the Jobs and Growth Tax Relief Reconciliation Act, the average tax cut would be $2,209.
- As a result of shifting the top tax rate reduction from 2006 to 2003, small business owners will receive 79 percent (about $9.7 billion) of the $12.4 billion in tax relief.
Capital Gains & Dividend Tax Cuts
The tax on capital gains and dividends will fall to 15 percent each between now and 2008. For taxpayers in the 10 and 15 percent tax brackets, the rate for both will be 5 percent until 2007 and zero percent in 2008. The capital gains tax reduction applies to gains realized on or after May 6, 2003, and to dividends received in 2003 or after
Lowering the capital gains and dividends taxes should help to lift equity markets and spur investment.
Immediate Impact
The legislation will increase economic growth and create new jobs.
The Treasury Department points out that this new legislation will immediately reduce the tax liability of 23 million small business owners.
In addition, employees should start receiving additional take-home income as the withholding payroll tables reflecting the new tax rates should be updated by July 1, 2003. Furthermore, while not directly impacting small businesses, the child tax credit was increased from $600 to $1,000, and the increased amount will be paid in advance with checks being mailed starting in July. These actions should work to stimulate disposable income, consumption, and the overall economy.
Office of Advocacy Factsheet
June 2003
Information courtesy of the Small Business Administration.
