Take Note of New Tax Breaks for Small Firms

Although taxes may not be the first thing on your mind in August, a new package of tax breaks for small businesses took effect late last month that will impact your 2007 filings and beyond.

Owners of small entities now can take a greater deduction for new purchases. Under a provision that's often referred to as "Section 179," business owners can deduct $125,000 in purchases instead of the previously allowed $112,000. But this only applies to firms that spend less than $500,000 on eligible equipment. If a business spends more than half a million dollars, the size of the deduction is reduced.

The tax breaks are part of a larger bill that bumps up the federal minimum wage. Tucked inside H.R. 2 is the Small Business and Work Opportunity Act along with other language addressing small firms.

The new law, which took effect July 24, also says you can deduct $8,980 if you purchase an electric vehicle for business use. But take heed, the deduction shrinks if you also use this vehicle for personal use. Separately, off-the-shelf software purchased for your business also may be deducted.

The law addresses family businesses too. A qualified joint venture, in which a husband and wife are involved in conduct of a trade or business, is no longer treated like a partnership. Both spouses now must report income and expenses and pay self-employment tax. Beginning next year, each partner will need to file separate schedules C and SE (pdfs) as sole proprietors. The intent of this change was to simplify the tax filings for these types of family firms, according to a summary from the congressional Joint Committee on Taxation (pdf).

The National Association of Tax Professionals offers a good breakdown (pdf) of how this bill impacts small businesses.

In an upcoming column, I'll take a look at whether members of the small business community think the recent minimum wage hike, which last month increased from $5.15 to $5.85 per hour, is a boon or a bust for micro firms. Small Business readers - what do you think? Feel free to post a comment below.

By Sharon McLoone |  August 7, 2007; 6:00 AM ET Tax Tips
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What about LLC's? My wife and I have established an LLC. Would we be affected by this?

Posted by: LLC's? | August 9, 2007 3:53 PM

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