Republicans and Democrats alike continue to fiddle with the tax code.
The latest changes come in an 803-page law called the American Jobs
Creation Act. This follows the equally hefty Working Families Tax Relief
Act of 2004.
Here is a plain language run-down of some of the more important
provisions in the new laws. Be sure to ask a qualified tax professional if
you have questions about these or other tax matters.
GRANDE TAX DEDUCTION - WITH LOTS OF FOAM
Domestic manufacturers get a big new deduction in the new law starting in
2005. In essence, the tax rate on manufacturing profit will be lower than
tax on other types of business income. Self-employed people, partnerships,
corporations and other types of taxpayer will enjoy these benefits, which
will phase in over the next several years. In 2005, taxable manufacturing
income will be reduced by 3%. By 2010, it will be reduced by 9%. Limits
apply.
So, who is a manufacturer? The law was stretched like Fat Albert's
Speedo to encompass those favored by lawmakers. Here are some businesses
treated as "manufacturers' under the new law:
- Construction companies
- Engineers
- Architects
- Computer software developers
And, shockingly, Starbucks. Their lobbyists succeeded in getting a
provision which expands the definition of manufacturing to include coffee
roasting. Starbucks tried to get barista activities included, too, but
that was more than Congress could swallow.
SALES TAX WRITE OFF
If you itemize deductions, you will now have a choice: you can either
claim your state income taxes paid as a deduction OR your state sales
taxes. If you live in a state with low or no income tax, and higher sales
taxes, you will probably benefit from the new law. If your state is like
Massachusetts, where income tax is generally taxed at 5.3% and sales tax
is 5%, you will probably still be better off claiming the traditional
deduction.
How the heck will you keep track of sales taxes paid all year? You have
a choice: save receipts, or use tables the IRS is to develop to figure an
allowance for various areas and income levels.
SUV SLIM DOWN
Starting NOW, light trucks and SUVs used in business will be subject to
stricter depreciation limitations. Previously, an Expedition-sized
loophole allowed taxpayers to write off the first $100,000 of cost of SUVs
used exclusively for business. For the rest of this year, and for 2005 and
beyond, immediate expensing will be capped at $25,000 for vehicles with
gross weight between 6,000 and 14,000 pounds. This is still way more than
drivers of regular cars enjoy. Amounts above $25,000 can still be written
off, just not all at once.
CINDERELLA'S GAS SIPPER
If you drive to the ball in a hybrid auto, you will continue to enjoy a
special tax deduction designed to reward purchasers of economical
vehicles. Many states allow a special break as well.
JALOPY DONATIONS HIT SPEED BUMPS ON NEW YEAR'S DAY
Starting in 2005, if you give your used car to a charity, your deduction
will be limited to the amount the charity actually gets when it sells the
vehicle. Different rules apply if the charity KEEPS the vehicle, rather
than selling it.
If you donate a car in 2004, the current rule applies: If you can
substantiate the value of the car, you can take a donation for that
amount, no matter how much the charity gets when it sells the car.
MUCH DEPRECIATED
After 2004, a special bonus depreciation deduction for business equipment
goes away. However, for most small businesses, the first $100,000 of
business property bought and placed in service will still be immediately
deductible. If you need gear or furniture for your business, consider
getting it before the end of the year to cut this year's taxes.
WAITER - PLEASE LOWER MY CHECK...
A new law makes certain restaurant property more quickly deductible.
...THAT'S QUITE AN IMPROVEMENT
And leasehold improvements will now be written off over 15 years.
Previously, such business build-out took 39 years to write off.
THAT DEPENDS ON WHAT YOU MEAN BY "KID"
How many kids do you have? Until now, the answer for tax purposes has been
"that depends'. A child could be counted as such for some tax breaks, and
not others. Starting in 2005, the definition will be uniform.
GIMME SHELTER
If you invest in various tax shelters, you must at least disclose your
investments to the IRS or face new penalties. Be sure to find out if you
come under these rules. Investors in hedge funds and special products sold
by brokerages might well be affected. Many of these "reportable
transactions' are perfectly legal. Reporting them to the IRS does NOT mean
you will get in tax trouble, though it certainly gives the government a
chance to see what you are up to.
CHALK IT UP
Educators can take a special deduction for the first $250 of out of pocket
classroom expenses they pay in 2004 and 2005. Additional amounts MAY be
deductible as well, so keep track!
AMT LURKS IN THE SHADOWS
The dreaded Alternative Minimum Tax (AMT) continues to threaten taxpayers
whose income is upper middle-class or above, and who take significant
itemized deductions or certain other tax breaks. Exercising ISOs is a
common trigger of AMT. Under the parallel AMT system, many deductions and
credits are not allowed, with a different, lower tax rate applied to the
resulting taxable income. If you think you may be subject to the AMT.
different tax strategies are advised.
IRS COLLECTIONS
The new law lets the IRS send overdue tax bills to private collection
agencies. Massachusetts and other states already do this. The IRS will now
be able to accept installment payment plans for less than the full amount
of the bill. Previously, any payment plan had to cover the entire amount.
AND SO ON...
But wait, there's more: An overhaul of the foreign tax credit; special
incentives for bow and arrow manufacturers; revised treatment for
donations of patents and sale of timber; looser rules on S Corporation
formation...and on and on. Given the complexity, we should rename it the
Accountant's Full Employment Act!