Consider Business Equipment Purchases Before the End of 2009

Businesses considering the purchase of equipment may be able to reduce their income taxes by making the purchase and placing the equipment in service before the end of 2009 rather than waiting until 2010.  Two significant provisions are currently set to expire at the end of 2009:  expanded first-year expensing and bonus depreciation.

The so-called "Section 179 Expensing" limit is $250,000 and will drop to $134,000 for tax years beginning in 2010.  The amount that may be expensed phases out dollar for dollar as the total year's purchases exceeds $800,000; dropping to $530,000 in 2010.  Unlike bonus depreciation, eligible equipment does not need to be brand new.  Furthermore, for fiscal year business whose tax year begins in 2009 and ends in 2010, the expensing provisions will include 2010 purchases made within the fiscal year, whereas for bonus depreciation, the purchase must actually be in 2009.

Bonus depreciation is 50% of the cost of brand new equipment (and certain other property) as first reduced by any Section 179 expensing.  Bonus depreciation expires at the end of 2009.  Regular depreciation applies to the balance of the cost of equipment that was not deducted under the Section 179 and bonus depreciation provisions.

Reduce Taxes with Health Savings Accounts

A Health Savings Account (HSA) is a tax-favored medical savings account established with a sponsoring financial institution.  Tax deductible contributions may be made and the account balance and earnings can be used to pay current and future qualified medical expenses tax-free.  The maximum deductible contribution is $3,000 in 2009 ($3,050 in 2010) for self coverage and $5,950 in 2009 ($6,150 in 2010) for a family health plan.  An additional $1,000 "catch-up" contribution may be made by those age 55 and older.  The contribution for a tax year may be made by the original (unextended) tax return due date of April 15th.  The deduction is "above-the-line" and reduces adjusted gross income (AGI).  Furthermore, the deduction is not "phased out" based upon levels of income.  Unlike flexible spending medical accounts under so-called cafeteria plans, the unused amounts in an HSA are not forfeited and ideally can be saved for retirement medical expenses.  Amounts withdrawn before age 65 to pay for non-medical expenses are subject to income tax plus a 10% penalty.  Under current health insurance reform proposals, this penalty would double to 20% after 2010.  To be eligible for an HSA, you must have a "high deductible health insurance plan," not be enrolled in Medicare, not be claimed as a dependent, and not be covered by a disqualifying health insurance plan.

Special Sales Tax Deduction for New Car Purchases Ends December 31, 2009

The American Recovery and Reinvestment Act of 2009 provides for a new deduction for the state and local sales and excise taxes paid on the purchase of a qualified new car, light truck, motor home, or motorcycle.  The vehicle must be purchased after February 16, 2009 and before January 1, 2010.  The amount of the deduction are the taxes paid on up to $49,500 of the purchase price.  The special deduction is available regardless of whether a taxpayer itemizes deductions on their tax return.  Even taxpayers living in states without sales taxes (e.g., Montana, Oregon, etc.) but that impose fees or non-sales taxes on the purchase of the vehicle would be entitled to a deduction of those fees or taxes.  The amount of the deduction is phased out for taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers.  For more information, see http://www.irs.gov/newsroom/article/0,,id=211310,00.html.