Tax Tips
January 2005
2004 Tax Legislation: Jobs Act - General Highlights
Tax planning for 2004 and next year just got a little more complicated but the news is very good for most people, especially businesses. Just weeks after passing one tax cut, Congress has passed another and this tax law is one of the largest in years. The American Jobs Creation Act of 2004 passed Congress on October 11. While many of its tax breaks are business-orientated, it also has some important tax incentives ...and minefields... for individuals.
This letter is a brief rundown of the most important tax cuts in the new law. The law is 600+ pages, so one letter won't be able to explain everything but it will give you an idea of how you might benefit from the tax cuts. After reviewing the key tax cuts, give our office a call. We can schedule an appointment to sit down and talk about how you can maximize the tax benefits in the new law.
Business incentives
First, let's start with the business cuts. Here are some of the highlights:
FSC/ETI repeal. You probably have read that the new tax cut was designed to help American exporters. Several years ago, the World Trade Organization ruled that our foreign sales corporation/extraterritorial income regime (FSC/ETI) was an illegal trade subsidy. The European Union, which is one of America's largest trading parties, started penalizing our exports. The penalties grew every month and that's one of the reasons Congress passed the new tax law. The new law repeals all of the FSC/ETI rules.
New deduction for manufacturing. Businesses are real winners in the new tax law. Congress has created a new deduction for "manufacturers." The great thing about this new deduction is that you don't have to be a traditional manufacturer. The new deduction isn't just for businesses that make things, such as auto, steel and paper manufacturers. Many types of businesses also qualify for the new deduction because Congress chose to define "manufacturer" very broadly. Businesses qualifying for the new deduction include traditional manufacturers, construction firms, engineering and architectural firms, film and video, computer software, agricultural processors, and even a few businesses thought of as primarily service providers. The deduction starts at three percent and grows to nine percent by 2010. Because of the way Congress designed the deduction, it effectively reduces the overall corporate tax rate for qualifying taxpayers.
If you own a business, your business may qualify for the new deduction. Our office can help you understand the new law and see if you qualify for the deduction.
Small businesses also get a helping hand from enhanced expensing. Two years ago, Congress raised the small business expensing threshold from $25,000 to $100,000. Congress also indexed it for inflation. Unfortunately, the $100,000 limit was temporary. It was scheduled to expire at the end of next year. The new law extends the $100,000 limit for two more years.
If you're planning to make some capital improvements to your business, you also may benefit from enhanced depreciation rules. The new law gives restaurant owners and other businesses special depreciation rates.
S corporation reform. Many people chose to operate their businesses as S corporations because they combine the best of corporations and partnerships. S corporations are so popular that they are one of the fastest growing business entities in the U.S.
S corporations are sure to be even more popular under the new tax law. Instead of 75 shareholders, S corporations can have 100 shareholders. One family can also elect to be treated as a single shareholder. If you're thinking of starting a business, or converting your business to a different structure, the new rules make S corporations very attractive. Our office can help you compare the advantages and disadvantages of different business entities and help you decide which one best fits your needs.
International taxes. The new law also simplifies some very complex international tax rules. Most of these rules impact large multi-national corporations. Congress streamlined the rules, and created the new manufacturing deduction, to help businesses losing the FSC/ETI tax break. At the same time, Congress also created some incentives for multi-nationals to bring their earnings back to the U.S., which Congress hopes will encourage job creation at home.
Important changes for individuals
Now let's take a look at the individual tax cuts and incentives.
The tax cuts for individuals aren't as generous as the ones for business in the new law. That's because this new law started life as a business bill. Congress had already enacted many individual tax cuts in the Working Families Tax Relief Act of 2004 . That law extended the $1,000 child tax credit, marriage penalty relief and AMT relief. Nonetheless, there are some important implications for individuals.
State sales taxes. For many years, taxpayers could deduct both their state and local income taxes and their state and local sales taxes. The 1986 Tax Reform Act did away with the deduction for sales taxes. The new law brings it back, but only as an option that allows taxpayers who itemize to take the higher of their sales taxes or state/local income taxes paid during the year. It's not only good news for people in states without income taxes. You'll need to calculate if your state/local income taxes or state/local sales taxes are higher. If you pay both, probably your state/local income taxes will be higher but especially if you've made a couple of expensive purchases during the year, your sales taxes may be higher. This option applies immediately, starting with taxes paid during the entire 2004 tax year.
Charitable donations. The new law cracks down on charitable donations, especially car and truck donations. Vehicle donation programs are very popular. In exchange for donating your old car or truck, you get a tax write-off. The amount of the write-off is the problem. According to the IRS, too many people have been claiming inflated deductions for their old cars. The deduction should reflect the fair market value of the car or truck.
The IRS was able to persuade enough members of Congress to revamp the vehicle donation rules. Starting next year, your deduction, if it's over $500, usually will be limited to the price the charity gets for selling it. The charity will also have to tell the IRS how much your vehicle sold for. So, if you're thinking of donating a used car or truck, you might want to make that donation before the new rules kick-in for 2005.
SUVs. The new law also changes the tax treatment of large SUVs. Because the vehicle caps on first-year expensing and depreciation do not apply to cars or trucks weighing more than 6,000 pounds, businesses and self-employed individuals could deduct up to the full cost of a large SUV. That tax break is over, but only in modified form. Effective immediately, vehicles over 6,000 pounds, but not more than 14,000 pounds, are limited by a $25,000 first-year expensing cap that significantly lowers --but does not eliminate-- immediate deductions for these heavy passenger-type vehicles.
Penalties. Congress had to come up with a way to pay for all these tax cuts and one way is to increase penalties for tax avoidance. Individuals and businesses investing in tax shelters and other abusive transactions will be liable for much higher penalties. The companies that promote these transactions also will be hit with very high penalties. If you've invested in any kind of tax shelter, any transaction that seems too good to be true, now is the time to voluntarily disclose that transaction to the IRS. Congress gave the IRS discretion to waive the harsh penalties and the agency likely will for taxpayers who cooperate.
The penalties aren't only for tax shelters. Individuals and businesses that file bogus or frivolous returns will be slapped with higher penalties. Return preparers who help file these frivolous returns also will be liable for monetary sanctions.
If you have any questions as to how these rules apply to
your particular situation, please do not hesitate to call
the Certified Public Accountants at Wood, Johnson, Heath,
P.C. at 512-343-8075.
