The 2004 Tax Acts
This issue discusses some of the major provisions of the 2004 Tax Acts – The American Jobs Creation Act of 2004 ("AJCA") and the Working Families Tax Relief Act of 2004 ("WFTRA").
The WFTRA offers relief primarily to married tax payers with children while the AJCA is primarily focused on business incentives. The provisions from both acts have been combined into convenient categories. The actual text of both of these bills contains 721 pages and includes 755 amendments to the Internal Revenue Code.
BUSINESS PROVISIONS
Depreciation – There is generally good news here. For new equipment, the section 179 deduction has been increased in 2004 to $102,000 and is extended until 2007. However, the deduction for 50% bonus depreciation expires December 31, 2004. The depreciation period for certain leasehold improvements placed into service before January 1, 2006 has been reduced from 39 to 15 years. Generally these improvements are for tenants and restaurants and are written off using the straight-line method. Also, for start-up costs that do not exceed $50,000, up to $5,000 can be expensed when incurred and any excess can be written off over 15 years (up from 5 years). Depreciation on SUV's as expected did not do as well…
SUV's – As you are aware, we have been advising you about the reduction in allowable Section 179 expense that was making it's way through Congress. The final regulations are in. The maximum deduction for vehicles with loaded weights between 6,000 and 14,000 pounds goes down to $25,000 for vehicles placed into service the date of enactment. For practical purposes, the deduction is still very much alive for 2004. For example, if you purchase a $60,000 vehicle this year, your total deduction, assuming you qualify for both expensing and bonus depreciation would be $46,000 in 2004. Also, these changes apply only to SUV's and not pick-up trucks, which continue under the old rules.
S-Corporation Changes – The maximum number of allowable shareholders increases from 75 to 100 and family members are treated as one shareholder. This is effective for tax years beginning after December 31, 2004. Other new rules generally provide relief for S trusts, S subsidiaries, banks, and inadvertent elections and terminations.
Charitable Contributions – Companies can take a deduction through December 31, 2005 for computers donated to libraries and schools equal to their basis plus 50% of the amount of ordinary income that would have been realized if the property had been sold. Nonqualified Retirement Plans – There are numerous complicated provisions that will require changes to plan documents including deferral elections, distributions, and transfers of property.
Manufacturing Deduction - A deduction for "qualified production activities income" (including farming, construction, architectural, engineering, oil and gas, and film and music companies) phases in from 2005 to 2010. The deduction of 3% in 2005 which grows to 9% in 2010 applies to both C Corporations and pass through entities
Tax Credits – Credits for research and development, work opportunity, welfare-to-work, and renewable energy have been extended through 2005.
Other – Additional benefits are now available for U.S . businesses that export to the European Union, farmers, and fisherman.
INDIVIDUAL PROVISIONS
Sales Tax Deduction – For 2004 and 2005, individuals can choose to deduct state and local sales taxes paid instead of state and local income taxes. For us in Florida, this is a great opportunity for a deduction we previously did not have, particularly for large purchases such as an automobile. For smaller purposes, this may still be a very valuable deduction, but the record keeping will be extensive although the IRS will be publishing tables that can be used. We will keep you informed of this in upcoming newsletters. Please note however, that this needs to be added back to determine income for purposes of the alternative minimum tax.
Deductions and Credits for Children –The definition of "child" has been simplified. Beginning in 2005, there is now a common definition for the dependency exemption, child credit, dependent care credit, and head of household filing status. A qualifying child must be under age 19 or a full-time student under age 24 by year-end, must share a home with the taxpayer for more than half the tax year, must not provide more than half of their own support, must be a child of the taxpayer, the taxpayer's siblings or a direct descendant of either. Also, a child now includes the taxpayer's stepchildren, adopted children, and eligible foster children. If the child satisfies the test for more than one taxpayer there are tiebreaker rules. In addition, the child credit will remain at $1,000 and the refundable portion has been increased from 10% to 15% for low-income families.
Donated Vehicles – The value of the deduction for vehicles (including cars, boats and aircraft) donated to charities is the amount of the actual sale proceeds or if not sold by the charity, the amount the charity acknowledges as its value. There are severe penalties for misrepresenting the value. This provision is effective for donations made after December 31, 2004. Both the taxpayer and the charity are required to supply the IRS a copy of the acknowledgment letter. In addition, the deduction for intellectual property made after June 3, 2004 will also be limited.
Other Changes
Extension of Provisions – Originally set to expire sooner, the Tax Acts extend until 2005 the $1,000 per child tax credit, the 10% tax bracket, marriage penalty relief for the 15% tax bracket and standard deduction, as well as the above the line deduction of $250 for educator expenses. Also extended are the credits for dependent care, the elderly and disabled, adoption, and Electric and Clean Vehicles.
Home Ownership using Like-Kind Exchanges – When an individual acquires a principal residence in a like-kind exchange, the new law requires that the individual own the property for at least five years prior to its sale or exchange in order for the exclusion of the gain to apply.
Alternative Minimum Tax – Finally some relief here as credits for child and dependant care, and Hope and Lifetime learning continue to be allowable for AMT purposes through 2005. Also, exemption amounts that were scheduled to be reduced will stay at previous levels ($40,250 for single and head of household $58,000 for joint filers, and $29,000 if married filing separately).
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