CLIENT ALERT

November 3, 2004

2004 Tax Legislation: Tax Breaks for Individuals and Business

On October 11th Congress passed two major tax laws: The American Job Creation Act of 2004 and the Working Families Tax Relief Act of 2004. These changes are the largest since 1997 and are far-reaching, affecting individuals as well as virtually every business. The following highlights some of the most significant adjustments, many of which present tax planning opportunities.

INDIVIDUAL TAX RELIEF

SUV Deduction

Under the new law, large sports utility vehicles will no longer be covered under the pre-existing loophole, allowing owners to deduct up to the full cost of the vehicle, not to exceed $100,000. Now, vehicles over 6,000 pounds (but not more than 14,000 pounds) are limited by a $25,000 cap, rather than $100,000.

Vehicle Donations

The new legislation has enacted substantial requirements pertaining to vehicle donations. The amount of deduction will now depend on how the donee organization uses the vehicle. If the charity sells the vehicle without using it, the amount of the charitable deduction cannot exceed the gross proceeds from the sale. If the charity does not sell the vehicle but retains it for their own use, they must provide the donor with an appraisal as to its value.

State Sales Tax Deduction

Individuals have the option in 2004 and 2005 to deduct state sales tax instead of state and local income taxes as an itemized deduction. This can be done in two ways, either by collecting receipts or by using tables prepared by the Secretary of the Treasury based on average consumption and other factors. This provision will have the most impact to individuals who live in a state with no income tax, such as Florida.

Tax Shelters

In a continued campaign against tax shelters, Congress has increased the penalties for promoters and investors failing to disclose their participation in abusive transactions. They have also voted to give the IRS discretion in applying these penalties, which can range from $10,000 to $200,000.

BUSINESS TAX RELIEF

Business Expensing and Depreciation

Small Business Expensing - Two years ago, as a temporary measure to stimulate the economy, Congress raised the threshold for small business expensing from $25,000 to $100,000. This higher rate was scheduled to fall back to $25,000 in 2006, but under the new law it has been extended through 2007.

Depreciation - Under the new law small businesses may benefit by a 15-year recovery period, using straight-line depreciation, for qualified leasehold improvements to nonresidential real property. This will include any improvements or additions made by the lessee after the date of enactment and before January 1, 2006. Prior law had required using straight-line depreciation over a 39-year period.

The New Manufacturers' Deduction

This year Congress has created a new deduction for manufacturers This deduction will effectively reduce the corporate income tax rate for domestic manufacturing three percentage points, from a top rate of 35 percent down to 32 percent. Furthermore, Congress has redefined the term "manufacturer" to include construction, engineering, energy production, computer software, filmmaking and the processing of agricultural products, in addition to traditional manufacturing. This means that many corporations, individuals, S corps, partnerships, estates, trusts and cooperatives may become eligible.

S Corporation Reform

Under the new law S corporation rules have been dramatically changed. The major changes include: Increase in the number of permissible shareholders from 75 to 100; approval to treat all members of a family as one single shareholder; permission for both traditional and Roth IRAs to hold shares in a bank that is an S corp; allocation of suspended passive losses or deductions between spouses incident to divorce; relaxed the rules for determining potential current beneficiaries of an electing small business trust; loosening of some passive activity loss rules as they relate to qualified subchapter S trusts; relief from inadvertent invalid subchapter S subsidiary elections and terminations; provision for qualified subchapter S subsidiaries to file information returns.

International Tax Reform

If you do business abroad, or invest abroad you may be affected in some way under the American Jobs Creation Act. The list of changes literary goes on for pages. Two of the more far-reaching changes include: a reduction in the number of foreign tax credit baskets from nine to two and changes to the interest expense allocation rules for the foreign tax credit limitation.

Extended business credits and deductions

Twenty temporary business incentives have been put in place by the 2004 Act, which will extend tax credits, and deductions that were set to expire during 2004. These include; research credit, welfare-to-work, work opportunity tax credits, environmental remediation expensing and the renewable source energy credit.

The changes made under the new laws are both extensive and comprehensive and may require taxpayers to readjust their tax planning and compliance strategies If you have any questions regarding how the new law's tax-saving opportunities apply to you, do not hesitate to contact our office. We would be happy to address any issues that may pertain to you.