New Tax Breaks for 2007

As a result of tax law changes and cost–of–living adjustments to existing rules, there are a number of important new tax opportunities for small businesses in 2007. Here are some areas from which you may benefit:

Capital equipment

You can elect to expense (immediately deduct) the cost of computers, office furniture, machinery and other equipment that you place in service in 2007. The expensing limit for 2007 is $112,000 (up from $108,000 in 2006). Expensing eliminates the need to depreciate equipment costs over a number of years.

Caution: The expensing limit is reduced dollar–for–dollar for each dollar of equipment placed in service in 2007 over $450,000.

Retirement savings

You can save more money in 2007 through retirement plans than ever before. The dollar limits on contributions and benefits to all types of plans have increased. The following table shows the maximum limits for different types of qualified plans:

* Retirement savings are increased by employer contributions. For example, in a 401(k) plan with a maximum employer contribution for someone age 50 or older, the top savings in 2007 is $50,000.

If your company has a 401(k) plan, you can amend it to accept Roth 401(k) contributions, which are after–tax contributions used to build up tax–free retirement income. The contribution limit for Roth 401(k)s is the same as for traditional 401(k)s. Unlike Roth IRAs, there is no income limitation on contributors to Roth 401(k)s.

Important: If you own a small business and have employees, you usually must make contributions on their behalf on a nondiscriminatory basis, a cost factor to consider in deciding which type of retirement plan to select.

Note: Eligibility to contribute to a personal traditional or Roth IRA is eased in 2007. The modified adjusted gross income (MAGI) limits for active participants to contribute to an IRA have been raised, along with the MAGI limits on the ability to fund a Roth IRA. The contribution amount for IRAs remains unchanged at $4,000, or $5,000 for those age 50 or older by the end of 2007.

Health care coverage

Health savings accounts (HSAs), which were introduced in the tax law in 2004, continue to grow in popularity as a way for small businesses to provide affordable health coverage. They combine a high–deductible health plan (HDHP) with a savings account designed to cover out–of–pocket medical expenses. For 2007, an HDHP is medical insurance with a deductible of at least $1,100 for self–only coverage and $2,200 for family coverage. Contributions made to the HSA are tax deductible in 2007 up to $2,850 for self–only coverage and $5,650 for family coverage. And those at least age 55 by year-end can add $800 more. These contribution limits are higher than amounts permitted in 2006. For more information on finding HDHPs in your state, go to www.hsainsider.com.

Car Usage

Small business owners who drive their personal car for business can opt to deduct their actual expenses or rely on a standard mileage rate. For 2007, the rate is 48.5¢ per mile (up from 44.5¢ per mile in 2006). This optional rate can be used for vehicles that are owned or leased. But relying on the standard rate does not relieve owners of the need to track the number of miles driven for business and the purpose of the travel.