Recent legislation has reduced the amount of taxes for which a small business is responsible. As a result of this recent legislation, there are three major areas of opportunity for small business owners to experience tax relief: (1) individual income tax returns, (2) growth incentives for small businesses, and (3) a reduction of taxes on dividends and capital gains. The Jobs & Growth Tax Relief Reconciliation Act of 2003 has been one of the most important instruments in bringing these opportunities for tax relief to small businesses.
1. Income Tax Reductions for Small Business Owners
Reduction in Individual Income Tax Rates
- The 10 percent and 15 percent tax brackets have expanded, which means more income is taxed at these lower rates.
- The 27 percent, 30 percent, and 35 percent tax rates were reduced 2 percentage points.
- The highest tax rate, 38.6 percent, was cut to 35 percent.
Repeal of the death tax until 2011
- This allows small business owners to pass their businesses on to family members without them having to pay the death tax.
2. Growth Incentives for Small Businesses
Increase and extension of bonus depreciation
- The Jobs & Growth Tax Relief Reconciliation Act of 2003 increased the “bonus depreciation” from 30 percent to 50 percent on qualified assets during the first year.
- These assets must have been acquired after May 5, 2003 and implemented before December 31, 2004.
Increased expensing (accelerated depreciation) for small businesses
- Businesses can now deduct the full cost of an asset (i.e. capital equipment) in the year it is placed in service, up to $100,000.
- This quadrupled the past limit of $25,000.
3. Reduction in Taxes on Dividends and Capital Gains
Reduction in capital gains rates for individuals
- Long-term capital gains were reduced to a minimum of 5 percent and a maximum of 15 percent from the previous levels of 8 percent, 10 percent, and 20 percent.
Dividends of individuals taxed at capital gains rates
- Dividends are no longer taxed at ordinary income tax rates, but rather at the lower capital gains rates of 5 percent and 15 percent.
- This reduces the impact of the double taxation that occurs when a corporation and then the shareholder are both taxed.