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 the New Year. Here are some areas from which you may benefit:
Capital equipment and improvements
The Small Business and Self–Employed Division (SB/SE) of the IRS now serves approximately 45 million taxpayers (more than 33 million of whom are fully or partially self–employed). This division You can elect to expense (immediately deduct) the cost of computers, office furniture, machinery and other equipment that you place in service in 2006. The expensing limit for 2006 is $108,000 (up from $105,000 in 2005). 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 2006 over $430,000.
If you make certain energy improvements to commercial realty, you can claim a new tax deduction of up to $1.80 per square foot. Qualified improvements include parts of interior lighting systems, heating, cooling, ventilation and hot water systems or the building envelope (e.g., insulation) designed to reduce energy consumption by 50% or more.
Retirement savings
You can save more money in 2006 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:
| Your age by the end of 2006 | SIMPLE (salary–reduction contributions)* | SEP | 401(k) (salary–reduction contributions)* |
| Under age 50 | $10,000 | $44,000 | $15,000 |
| Age 50 or older | $12,500 | $44,000 | $20,000 |
* 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 2006 is $49,000.
Starting in 2006, 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.
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 2006, an HDHP is medical insurance with a deductible of at least $1,050 for self–only coverage and $2,100 for family coverage. Contributions made to the HSA are tax deductible in 2006 up to $2,700 for self–only coverage and $5,450 for family coverage. These contribution limits are higher than amounts permitted in 2005. For more information on finding HDHPs in your state, go to www.hsainsider.com.
Building contractors
Homebuilders may qualify for a new tax credit for building energy–efficient homes. The credit is up to $2,000 per home. It is wise to arrange a meeting with your CPA or other tax advisor to discuss the full–range of tax–savings strategies in which you can partake. The sooner you act, the more money you may save.
Read more about author and tax expert: Barbara Weltman.
