Jobs and Growth Tax Relief Reconciliation Act of 2003
submitted by
Andrew Coen, MT, CPA
Nancy Lee Watts, MBA, CPA
Norman Jones Enlow & Co., CBR Auditors
On May 28, 2003 the President signed into law the Jobs and Growth Tax Relief Reconciliation Act of 2003 (the “Act”), which provides tax planning opportunities for both individual and non-individual taxpayers alike.
REALTORS®, because they are typically independent contractors, have opportunities to reduce their tax burden in the coming years.
As independent contractors, it is not unusual that you are required to purchase computers, printers, PDAs, cellular telephones, office furniture and computer software.
The Act provides that the maximum dollar amount that may be deducted under Internal Revenue Code Section 179 is increased to $100,000 for property placed in service in tax years 2003, 2004 and 2005 (adjusted for inflation in 2004 and 2005).
Section 179 applies only to qualifying property defined as depreciable tangible personal property for use in an active conduct of a trade or business.
The law provides that the ability to currently expense the purchase of qualifying property will be phased out. There is a dollar for dollar reduction of the $100,000 for property acquisition in excess of $400,000 for tax years 2003, 2004, and 2005 (adjusted for inflation in 2004 and 2005).
The expensing provisions of the Act apply to “off the shelf” computer software placed in service in 2003 or 2004.
To stimulate investment and to encourage businesses to modernize, the Act includes special first year bonus depreciation.
The Act provides an additional first year bonus depreciation deduction equal to 50% of the adjusted basis of qualified property.
In general, to qualify for the 50% additional depreciation deduction, the property must be acquired after May 5, 2003 and before January 1, 2005.
Property does not qualify for the 50% additional depreciation if there was a binding written contract for the acquisition of the property in effect before May 6, 2003.
A taxpayer is allowed to elect out of the additional first year depreciation deduction for any class of property for any taxable year.
In order for property to qualify for the additional first year depreciation deduction, it must meet all of the following requirements: property with a recovery period of 20 years or less for tax deprecation rules; the new property must be acquired by the taxpayer on or after May 6, 2003; and the property must be placed in service before January 1, 2005.
Here is an example (right) to show the interplay between Section 179 expensing rules, the 50% additional first year depreciation rules and regular depreciation rules.
In September of 2003, a REALTOR® buys and places in service $100,000 of new five year recovery property; the taxpayer elects to expense $50,000 under Section 179. Their regular depreciation rate for the five-year property is 20% in the year of acquisition.
In this situation, the taxpayer would be able to deduct in the year of acquisition, $80,000 of the $100,000 invested in tangible personal property.
As a REALTOR®, it is imperative that you own a passenger automobile to transport clients to properties.
Under the Act, taxpayers receive an increased first year depreciation allowance for passenger autos that are qualified property. Qualified property means the passenger auto must be used in an active trade or business and is used more than 50% for business.
Passenger automobiles are qualified property eligible for bonus 50% first year depreciation.
Assume a REALTOR® buys a new $30,000 passenger automobile and the automobile is used 100% for business. The dollar cap for depreciation of luxury automobiles for 2003 is $3,060.
By taking advantage of the special 50% first year depreciation in this example, the taxpayer could receive a current year deduction of $10,710.
For luxury automobiles, the threshold for non-electric vehicles eligible for the 50% first year depreciation is a maximum of $15,300 of the purchase price. Thus, 50% of $15,300 is $7,650 plus the $3,060 permitted for luxury automobile is $10,710.
By falling outside of the definition of “passenger automobile,” a large deduction is available for trucks and vans, including minivans and sport utility vehicles with a gross vehicle weight exceeding 6,000 pounds. The vehicle with a gross vehicle weight of 6,000 pounds will escape the constraints of the luxury or passenger automobile caps of $3,060 and $7,650.
A REALTOR® that acquires a Hummer, Mercedes M-Class SUV, Land Rover, BMW X5, Escalade, or Lexus LX470 and uses it more than 50% in business can take advantage of Section 179 expensing provisions and/or the special 50% additional first year depreciation. Thus, for an investment of $50,000 in a 100% business use Hummer, a deduction of $50,000 could be claimed in the year of acquisition.
Because many REALTOR®’s invest in residential or non-residential real estate or advise buyers or sellers of real estate, you need to be aware of the reduction in the capital gain tax rate.
The Act reduced the prior 20% rate on net capital gains to 15%.
The provision applies to sales and exchanges on or after May 6, 2003 and before January 1, 2009.
The “28% gain rate” that applied to long-term gains from the sale or exchange of collectibles… stamps, baseball cards, coins, guns…was not reduced, nor was the 25% rate on unrecaptured depreciation on rental real estate.
The reduction in the capital gain rates, combined with the acceleration of the reduction of individuals’ ordinary income tax rates, results in a spread of 20% between the capital gain rate of 15% and the highest marginal rate of 35%.
This high spread raises the stakes for avoiding “dealer” status with respect to gain received on the disposition of assets.
Because the 15% capital gain rate is scheduled to sunset for tax years beginning after December 31, 2008, it provides less of a tax incentive for you or your clients to enter into like kind exchanges.
The income tax planning concept discussed in the preceding paragraphs are available in both 2003 and 2004.
For those individuals wishing to reduce their federal, state and local income tax burdens, the keys typically are expensing of acquisition of tangible assets as quickly as possible, and where vehicles are used in business, maintaining records to support the greater than 50% business use.
The most effective tax planning begins on the first day of the tax year and continues by monitoring the plan on a monthly basis throughout the year.
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