The tax laws in the United States are always in a constant state of flux. Every small business owner needs to be on top of new tax laws as they are enacted in order to make key decisions on business expenses. Normally, there are only minor changes to the tax law from year to year. But the year 2008 has been a bit of an anomaly since so many tumultuous activities have happened all at once. I’ll try and outline some of the new tax changes that are the most likely to affect the common business owner or real estate investor.

The Homeowner’s Deduction Has Changed For The Worse

After all of the bad loans and speculative buying that led to the real estate debacle, Congress has decided to crack down on the tax deductions for homeowners. In the past, you could exclude up to 250K(or 500K for married couples) of real estate gains off your tax return as long as you used your house as your primary residence for 2 out of the last 5 years. For example, if I purchased a home, lived in it for 2 years and rented it for the next 3, I would be fully tax exempt on any profits resulting from the sale of the property up to 250k.

Starting in January 1, 2009 however, you will only be allowed to take the exemption for the pro-rated amount of time you used your house as your primary residence. For example, let’s say your home was your primary residence for 2 of the last 5 years. Whereas you could take the full exemption before, you can now only take two-fifths of the exemption on your taxes.

What this means is that if you have rental property that you are planning on selling in the coming years, you should move back in as your primary residence before 2009.

Property Tax Laws Have Changed In Some States

In the past in California, you had to pay your property taxes only twice a year in equal increments. Starting in 2009, all homeowners with under 20% equity in their home must have their property taxes impounded as part of their monthly payments. This can have a direct hit on your immediate cash flow since you now have to essentially pay your property taxes each month as opposed to bi-annually. As long as you have 20% or more equity in your home, you shouldn’t have to worry about this. You’ll have to check to see if this tax changes applies to your particular state.

New Vehicle Tax Deductions

You’ve probably noticed that sales of large trucks and SUVs have been extremely slow due to rising gas prices. Because the automakers lobbied heavily for help from Congress, Congress passed a new law which allows you to deduct up to 25k off of the purchase price of any vehicle over 6000 pounds used for business purposes. Of course the percentage deduction fully depends on what percentage you use the vehicle for business, but this is still a large sum of money. This deduction only applies for large vehicles purchased before the end of 2008. If you were planning on purchasing a business vehicle anyways, you might want to do so by the end of the year to take advantage of this tax break.

The other major tax change related to your vehicle is that the new mileage deduction is now 58.5 cents as opposed to 50.5 cents. The depreciation limits have been increased as well. The new laws now specify that you can depreciate in the first year up to 11k for new passenger autos or vans and trucks that weigh less than 6000 pounds.

New Section 179 Rules

This is probably the tax change that will have the largest effect on small businesses. Starting in 2008, the IRS has increased the section 179 deduction to 250k. This is huge! Now you can afford to purchase more capital equipment tax free to start up your business. With the economy in its current doldrums, Congress is clearly doing whatever they can to foster business activity and growth. Now is the best time to be starting your own business if you haven’t done so already.

If you wish to learn more about tax deductions, please read my articles on how to save on your taxes.

Disclaimer: I am not a tax professional so please consult your accountant or do your own research before making any tax related decisions.

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