Use the New Laws...
The American Jobs Creation Act of 2004, signed into law on October 22,2004, contains $130 billion of tax breaks for businesses. Be sure to get your share by knowing which opportunities apply to your type of business. Also watch out for new restrictions that may cut your tax savings.
Buy equipment and make capital improvements
First-year expensing, which allows businesses to deduct the cost of equipment purchases instead of depreciating them over five or seven years (or some other period) has been extended fro two more years – through 2007. The dollar limit for expensing in 2004 is $102,000; it increases to $105,000 in 2005 and will be adjusted for inflation in 2006 and 2007.
You don’t have to decide when you make the purchase whether you’ll use expensing or depreciation; you have until you file your return to make this election. And you can change your mind by filing an amended return – you do not need IRS consent to make or revoke an expensing election.
Write off leasehold improvements more rapidly. Now you can amortize leasehold improvements as well as improvements to restaurant property over 15 years. Restaurant property for this purpose means property placed in service more than three years after the building is place in service. The restaurant must use more than more than half of the building’s square footage for food preparation and on-premises consumption of meals.
If the leasehold and restaurant improvements qualify as tangible personal property (e.g., special wiring), the improvements can be separately depreciated over their shorter recovery periods (five or seven years) using accelerated depreciation rather than amortized over 15 years.
Heavy SUVs no longer can be fully expensed up to the dollar limit (e.g., $105,000 in 2005). The expensing limit is now up to $25,000 for vehicles weighing more than 6,000 pounds but not more than 14,000 pounds.
S corporation reform
The rules for S corporations have been liberalized somewhat with 10 new provisions. For example, the law raises the number of eligible shareholders to 100 (up from 75). All family members (not just husbands and wives) are grouped together and treated as one shareholder. Family members include common ancestors, lineal descendants (not more than six generations removed) of common ancestors and spouses or former spouses of these relatives.
If you are considered a “domestic producer,” you may be able to deduct a percentage of your income to effectively cut the top tax rate by as much as three percentage points. More specifically, the deduction is a percentage of the lesser of (1) qualified production activities income or (2) taxable income (for businesses) or adjusted gross income (for individuals). The percentage is 3% in 2005 and 2006, 6% in 2007 through 2009 and 9% after 2009. The deduction cannot exceed 50% of the business’s W-2 wages.
“Domestic producers” includes not only those in traditional manufacturing but also construction, engineering, energy production, computer software, files and videotape and processing of agricultural products.
Deferred compensation
New rules limit the ability of deferred compensation plans (e.g., bonus deferral plans, supplemental executive retirement arrangements, stock appreciation rights and phantom stock plans) to pay out funds early or keep them in the plan indefinitely. Doing so results in the plan indefinitely. Doing so results in a new penalty. Generally, the new rules require plans to impose certain restrictions; if they don’t, tax on deferred amounts is accelerated to the vesting date of the funds, which may be much earlier than the expected payout date.
Employees must elect deferral before performing the work that gives rise to the pay (usually before the beginning of the new year). Midyear elections can be made within 30 days of eligibility to participate in the deferred compensation arrangement. Payout must be limited to certain key events, such a disability, leaving the company, a change in control of the company and an unforeseen emergency.
have all existing plans reviewed by your tax advisor. Weigh new deferred compensation plans in light of the new rules.
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