by Erin Swaney, MBA and Nancy Lee Watts, MBA, CPA
Norman, Jones Enlow & Company, CBR Auditors
Tax planning got slightly more complex for 2004 and 2005. Congress passed two bills before the November 2004 election regarding tax cuts: the Working Families Tax Relief Act of 2004 and the American Jobs Creation Act of 2004.
The American Jobs Creation Act is the largest single piece of legislation passed since 1997, and together with the Working Families Tax Relief Act, the text of both bills is over 700 pages and includes 755 amendments to the Internal Revenue Code. This article is not intended to explain everything, but it will give you an idea of how the tax cuts might affect you and your business.
Businesses
The following are some of the new laws enacted that affect businesses.
Start up organization expenditures
Previously, a taxpayer who started a business was required to amortize start up and organizational costs over a 5-year period starting in the year the business began. Under the new law, a taxpayer starting a business can deduct up to $5,000 of start up and organizational expenses in the taxable year in which the trade or business begins. The $5,000 amount must be reduced by the amount of startup and organizational expenses in excess of $50,000. The remainder of the expenses not deductible in the current year must be amortized over a 15-year period beginning with the month the business begins. This deduction will benefit smaller businesses that have around $5,000 of start up costs.
Sec. 179 expense
The amount of the cost of a qualifying business asset that a taxpayer could deduct under Section 179 increased from $25,000 to $100,000 from 2002 through 2006 (state law may differ). The new law extends the expensing option through 2008. The amount indexed for inflation in 2004 is $102,000.
Special bonus depreciation
If taxpayers acquire eligible business property in 2004, they may be able to take advantage of the 50 percent bonus depreciation rule if the property was placed in service before January 1, 2005. The new laws did not extend the bonus, so it does not apply to property that is acquired after 2004.
- The amount a taxpayer could deduct under Section 179 increased from $25,000 to $100,000 from 2002 through 2006. Under the new law, this increased amount has been extended through 2008. The amount indexed for inflation in 2004 is $102,000.
Standard Mileage Rate
The standard mileage rate for all miles driven in 2004 is 37.5 cents per mile, which will increase to 40.5 cents per mile in 2005.
SUVs
The tax treatment of SUVs changes under the new laws. Previously, there were limits on maximum depreciation amounts that could be claimed on passenger automobiles; however, these rules did not apply to vehicles that weighed over 6,000 pounds. Therefore, businesses were able to deduct the full cost of a large SUV. The new laws limit the maximum Sec. 179 deduction to $25,000 in the first year for vehicles weighing between 6,000 and 14,000 pounds. This rule applies to those SUVs that were purchased after the enactment of the American Jobs Creation Act signed October 22, 2004.
Individuals
The following are some of the new laws enacted that affect individuals.
Standard deduction and tax bracket increases
The basic standard deduction amount increases under the new laws for couples who file married filing jointly. Without the new laws, the basic standard deduction for married couples filing jointly in 2005 would have only been 174% of the standard deduction for single filers. The 2005 standard deduction amounts under the new laws are the following:
- Married filing jointly $10,000
- Surviving spouses $10,000
- Head of household $7,300
- Unmarried $5,000
- Married filing separately $5,000
The 10 percent and 15 percent tax brackets also increased in size for joint filers. The following details the increases in the two brackets:
State sales taxes
Prior to 1986, taxpayers were allowed to deduct both their state and local income taxes and their state and local sales taxes. The 1986 Tax Reform Act eliminated the deduction for sales taxes. The new laws bring this deduction back. However, it only allows taxpayers who itemize to take the higher of their state and local income taxes OR their sales taxes paid during the year. Taxpayers are not allowed to deduct both state income taxes and state sales taxes. The new laws are helpful to those individuals in states without income taxes.
A taxpayer can determine the state and local sales tax deduction amount in two different ways. The taxpayer can deduct the total amount of sales tax based on accumulating receipts showing sales taxes paid. As an alternative, taxpayers can use tables created by the Secretary of the Treasury, which are based on the average consumption of taxpayers on a state-by-state basis taking into account a taxpayer's filing status, number of dependants, adjusted gross income, and local general sales tax. The effective date for this change is for taxable years beginning after December 31, 2003 and prior to January 1, 2006.
Charitable contributions of vehicles
Prior to the new laws, if an individual donated a vehicle to a charity that was valued over $500 but less than $5,000, the donor was able to deduct the fair market value of the vehicle based on the established used car pricing guide. If the vehicle was valued over $5,000, the taxpayer was required to obtain a qualified appraisal.
Beginning in 2005, a taxpayer will no longer be able to deduct the vehicles value based on the used car pricing guide. If the value of the vehicle is greater than $500, the taxpayer's deduction will be limited to the amount the charity received for selling the car. Therefore, taxpayers are now required to obtain a written acknowledgement from the donee for vehicles with values over $500. The acknowledgement must contain the taxpayer identification number, vehicle identification number, a description of how the car will be used, and the gross proceeds from the sale. The acknowledgement must be provided within 30 days of sale of a vehicle that is not significantly improved or materially used by the donee. The taxpayer cannot deduct more than the gross proceeds received from the sale. The change takes effect for contributions made after December 31, 2004.
For the tax year 2004, however, you must still be cautious when donating a car to a charitable organization. If audited, you must be able to prove that the value of the donation matches the condition of the vehicle at the time of the donation. Therefore, you should maintain extra documentation, such as pictures of the vehicle and a statement from a mechanic as to its condition.
Sale of personal residence
Taxpayers are allowed to exclude from income up to $250,000 for individuals, and up to $500,000 on most joint returns, of gain realized on the sale of a principal residence. In order to get the full benefit of this exclusion, taxpayers must own their house for two years and use the property as their principal residence. If a taxpayer received their home because of a like-kind exchange, the new laws lengthen the ownership period to five years before the taxpayer can benefit from the exclusion.
Other
Several other changes were made with the new laws, outlined below:
- The definition of a qualifying dependant has become a more uniform definition applied to the deductions and credits on an individual tax return.
- The Child Tax Credit will remain at $1,000 per child through 2010. The refundable portion will go from 10 percent to 15 percent of taxpayer's earned income beginning in 2004.
- The requirement that a taxpayer must maintain a household in order to claim the dependent care credit is eliminated beginning in 2005.
- The new laws continue the higher alternative minimum tax exemptions through 2005.
- The use of personal tax credits have been extended through 2005.
- Before the new laws, only taxpayers, and not corporations, were required to obtain a qualified appraisal for donated property valued at more than $5,000. In addition, taxpayers were not required to attach qualified appraisals to their tax returns except if the property was contributed artwork exceeding $20,000. The new law now requires corporations to obtain a qualified appraisal, and it requires all taxpayers (individuals, partnerships, and corporations) to attach the qualified appraisal to the tax return if the value of the property exceeds $500,000.
This article is intended to highlight several of the areas affected by the new tax laws. For more information on these new rules, please contact your personal financial or tax advisor.
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