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BROOKWOOD TAX SERVICE End the Hassle - Hire a Tax Pro! |
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BROOKWOOD TAX SERVICE End the Hassle - Hire a Tax Pro! |
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404-915-6268 |
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TAX LAW CHANGES FROM THE WORKING FAMILIES TAX RELIEF ACT OF 2004 & AMERICAN JOBS CREATION ACTOF 2004
· Congress extended the Section 179 “expensing” first-year write-off for business equipment purchases for two more years (it had been scheduled to expire on 12/31).
This means up to $102,000 (2004 amount) worth of new business equipment can be written off in the year of purchase as long as a small business bought less than $410,000 total worth of new business assets during the year. The write-off amount will be indexed for inflation in 2005, 2006 and 2007.
BUT, the so-called “SUV DEDUCTION” got radically downsized to a limit of only $25,000. The limit applies to vehicles with loaded gross weight ratings of more than 6,000 pounds up to 14,000 pounds. That limit took effect on October 22, 2004, the day the president signed the bill into law.
The bill did NOT extend the “bonus” depreciation write-offs of 50% or 30% of the purchase price, so those extra write-offs end on 12/31/2004. The bonus first-year write-offs can be used by a business that has no profit for the year to create a net loss and generate refunds from prior tax years. The Section 179 expensing deduction can be taken only if a business has net profits or, in the case of individuals, it can be taken if the individual with a business loss as other earned income, such as W-2 income.
· Qualified leasehold improvements made to business real property are now eligible for a shorter, 15-year depreciation write-off schedule, rather than the 39-year period for non-residential property.
A “qualified” improvement is one made to the interior of a building by either the lessor or lessee, and placed in service more than three years after the building was placed in service. The provision also applies to qualified restaurant properties in cases where the restaurant occupies more than half the square footage of a building.
(Note that business taxpayers already had the option to use even shorter write-off periods for tangible personal property, such as carpeting, lighting and HVAC systems, installed in a business building.)
· For C Corporations, there is a new tax rate reduction for “manufacturers” which will shave 2005 and 2006 corporate tax rates by three percentage points, increasing to six percentage points in 2001 through 2009.
The details will be forthcoming as the IRS issues regulations to implement the law, but the term “manufacturing” in this case appears to cover construction, engineering, energy production, computer software development, film and video productions and processing of agricultural products.
· Several changes are made to the S Corporation regulations, including increasing the limit on the number of shareholders, that make the S Corporation entity (or S corporation taxation of an LLC) a bit more attractive than it already is.
· The law drastically tightened the business write-off for personal use of company aircraft by officers, directors and stockholders who own more than 10% of a company (C corp or S corp).
· The law placed strict limits on early withdrawals from non-qualified deferred compensation plans by business executives.
· The law allows taxpayers to deduct EITHER state and local income taxes OR state and local sales taxes on their federal tax returns (Schedule A, itemized deduction).
This gives taxpayers living in states with no income tax a deduction similar to that enjoyed by taxpayers in other states. BUT, in states that have both income and sales taxes, taxpayers may pick whichever gives them the larger deduction.
The sales tax deduction can be based either on sales receipts or a table the IRS will develop (but likely will not be able to produce before April 15th of next year, so it’s not certain what we will use for filing 2004 tax returns). Note that, in addition to the deduction allowed by the IRS tables, taxpayers can add sales taxes for large purchases such as cars, boats and airplanes.
· Charitable deductions for vehicle donations will be sharply restricted after this year.
You may want to send your wreck to the Salvation Army before December 31st, because the allowable deduction is likely to decrease dramatically from 2005 on. If a charity takes a donated vehicle and sells it, the charity must report the sales amount back to the donor, and that amount is all the taxpayer can deduct. Many elderly donated vehicles are sold at auto auctions for only a few hundred dollars. For 2004 tax returns, take pictures of the vehicle to document its condition, note the mileage, print out the private sale values from car web sites such as Edmunds and Kelley Blue Book and get a dated receipt from the charity BEFORE the date the tax return is filed.
· Taxpayers who use a provision of the tax code called Section 1031 to delay paying tax on capital gains from rental property and then move into the home received in the exchange, will no longer be allowed to claim the Section 121 tax exclusion when they sell the house if the sale happens less than five years after the exchange.
· Taxpayers who win “unlawful discrimination” lawsuits will be allowed to deduct attorney’s fees and costs above the line from the settlement amount, and will pay tax only on the net. It appears the bill did NOT resolve the questions about deducting attorney fees for other types of lawsuits.
· The child tax credit amount is increased to $1,000 for 2005 through 2009 (it had been schedule to drop to $700 next year).
· Members of the military receiving combat pay that is tax-free will be able to count the amount of combat pay in computing their eligibility for the Earned Income Credit.
· The educator deduction for up to $250 for classroom supplies purchased out-of-pocket is extended to cover 2004 (this year) and 2005.
· The income exemptions for Alternative Minimum Tax (AMT) have been extended through 2005 at the same amounts as this year ($58,000 married filing joint and $40,250 for all others), delaying what amounts to a scheduled AMT “tax increase” for one more year. The IRS national taxpayer advocate has repeatedly urged Congress to lift the exemptions even more to prevent millions of middle class taxpayers from falling under AMT over the next five or six years.
Under AMT, many normal deductions are no longer allowed, and taxpayers pay a flat rate tax on income (28% for most AMT taxpayers). Among the tax return items that can “push” a taxpayer into AMT: state and local tax deductions, some miscellaneous itemized deductions, large capital gains, qualified company stock options exercised and some times of non-taxable municipal bond interest.
One substantial benefit allowed under the new laws is that several tax credits now apply to AMT as well as regular tax. Those credits include:
§ Dependent Care Credit § Credit for the Elderly and Disabled § Adoption Credit § Child Tax Credit § Hope and Lifetime Learning Credits § Saver’s Credit (for retirement plan contributions)
· The deduction phase-out for qualified electric and clean-fuel vehicles has been delayed, so the full $4,000 write-off (10% of vehicle cost) is still available for 2004 and 2005.
· ESTABLISHMENT OF A UNIFORM DEFINITION OF A QUALIFYING CHILD This definition applies (with just a few variations) to a qualifying child for purposes of the dependency exemption, the child tax credit, the earned income credit, the dependent care credit and Head of Household filing status.
Obviously, this new definition has no impact on taxpayers who have no children of their own and no children living in their homes, and it probably will not impact married couples that live together with their own offspring and file jointly.
For single, divorced and separated taxpayers who have their own or children of others living in their households, the rules may be substantially different this year. There are too many variations to address in this brief summary. Those taxpayers need to study the new rules carefully and probably should consult a qualified tax professional.
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