FORUM RESPONSE
1. RESPONSE TO TREMINA LITTLEJOHN
Tremina Littlejohn(Nov 7, 2018 8:01 PM)- Read by: 2
How has Congress used depreciation to target small business activities for special treatment?
1. Congress has raised the tax rate of small business by 2 percent to cover the tax hike of higher salary employees. There are a few things that are related to employee taxes that are not beneficial to small businesses anymore. Health care cost for one has increased for small business leaving them no choice but to either raise their employee premium or take the hit to their bottom line
How can changes in depreciation rules be used to regulate the economy?
1. The only change that would regulate the economy is to reduce the percent that small businesses pay in taxes. Small businesses make up enough of the economy that if they were given the tax breaks that large corporations were given they would invest more in the communities that they are in. Corporations only benefit the community that they are often times headquartered in. The branches of the company do not tend to have much community outreach.
What advice would you give a tax client who owns a small business if they asked you about buying a vehicle?
1. My advice would be to purchase a new vehicle and to depreciate it over a ten year period that way they are able to take full advantage of the tax laws. The vehicle should be used as much as possible to also take advantage of the gas mileage deductions that are available
Comer - Small Business Depreciation Tax Advantage?
Brett Comer(Nov 7, 2018 6:55 PM)- Read by: 3
How has Congress used depreciation to target small business activities for special treatment?
Depreciation allows a business to recover the cost of a variety of items and equipment needed to run its business. More specifically depreciation allows a business that buys items such as vehicles or machines to run its business can deduct a portion of the cost of that item each year from its taxable income until the cost is completely recovered. Over the years congress has changed the laws regarding depreciation sometimes allowing business to recuperate the cost of capital expenses quicker than others which can provide businesses tax advantages. Currently businesses us the Modified Accelerated Cost Recovery System (MACRS) which allows business to use accelerated depreciation on much of the equipment they need to conduct business (Spilker et al., 2014). The default MACRS method uses double the declining balance which allows business to take twice as much depreciation during the first year compared to the straight-line method which requires the business to spread out the depreciation equally over the recovery period (Spilker et al., 2014). For example, if a business bought a vehicle costing $15,000 it would be able to utilize MACRS half-year convention and a five-year recovery period to deduct $3,000 from its income during the year it purchased the vehicle and would deduct $4800 during year 2 of ownership for a total deduction of $7,800 (Spilker et al, 2014).
Small businesses, in particular, are responsible for employing a significant number of employees and produce a significant amount of economic output. Congress sometimes attempts to boost the economy by changing the tax laws so that they are supportive of small businesses (Bruce, Deskins, & Gurley-Calvez, 2014). Instead of using marginal tax rates which effect more than just small business Congress often utilizes depreciation rules to stimulate small business since they are an important part of the economy (Bruce et al., 2014). One specific way small business is stimulated using depreciation is through immediate expensing election which is also referred to as a §179 expense (Spilker et al., 2014). In 2014 businesses were able to immediately expense up to $500,000 of tangible personal property placed in service during 2014 instead of having to utilize normal depreciation methods (Spilker et al., 2014). This law targets small businesses because it is subject to a phase out limitation that makes business reduce their $500,000 immediate deduction dollar for dollar based on the value of equipment place in service that year over $2,000,000 (Spilker et al., 2014). This means that a business that purchases over $2,500,000 of tangible property is only able to utilize normal depreciation methods and is not eligible for the immediate expensing provisions available to smaller businesses (Spilker et al, 214). Congress stimulates the economy and supports small business through this type of legislation because it creates a huge tax incentive for a small business to invest during years when immediate expensing is available. This tax benefit changes form year to year based on Congress’ desire to stimulate small business. Immediate expensing is a tax benefit because a small business can immediately deduct up to $500,000 of expenses thereby reducing its overall taxable income for the year.
References
Bruce, D., Deskins, J., & Gurley-Calvez, T. (2014). Depreciation rules and small business
longevity. Journal of Entrepreneurship and Public Policy, 3(1), 10-32. doi:http://dx.doi.org.ezproxy2.apus.edu/10.1108/JEPP-01-2012-0006
Spilker, B.C., Ayers, B.C., Outslay, E, Weaver, C. D., Barrick, J. A., Robinson, J. R., & Worsham, R. (2015). Taxation of individuals and business entities. New York, NY: McGraw Hill Education.