Tax planning just got a little more complicated, but the news is very good for most people, especially businesses.
Just weeks after passing one tax cut, Congress has passed another, and this tax law is one of the largest in years. The American Jobs Creation Act of 2004 was passed by Congress on Oct. 11. While many of its tax breaks are business-orientated, it also has some important tax incentives - and minefields - for individuals.
The law is more than 600 pages; we will discuss only a few.
Small businesses win
Small businesses are real winners in the new tax law. Congress has created a new deduction for manufacturers. The great thing about this new deduction is that you don't have to be a traditional manufacturer to take advantage of it. Businesses qualifying for the new deduction include traditional manufacturers, construction firms, engineering and architectural firms, film and video, computer software, agricultural processors and many service providers. The deduction starts at 3 percent and grows to 9 percent by 2010.
If you own a small business, your business many qualify for the new deduction.
Two years ago, Congress raised the small business expensing threshold from $25,000 to $100,000. The new law extends the $100,000 limit for two more years. This limit is adjusted each year for inflation. The adjusted amount for 2004 is $102,000.
If you're planning to make some capital improvements to your business, you also may benefit from enhanced depreciation rules for leasehold improvements.
Changes for individuals
The tax cuts for individuals in the law aren't as generous as the ones for business. Congress had already enacted many individual tax cuts in the Working Families Tax Relief Act of 2004. That law extended the $1,000 child tax credit, marriage penalty relief and alternative minimum tax relief.
Sales tax deductions are back. For many years, taxpayers could deduct either their state income taxes or their state and local sales taxes. Congress did away with that option a few years ago but the new law brings it back.
The new law also cracks down on charitable donations, especially vehicle donations. Vehicle donation programs are very popular. In exchange for donating your old car, truck or boat, you get a tax write-off. The amount of the write-off is the problem. According to the Internal Revenue Service, too many people have been claiming inflated deductions for their old cars. The deduction should reflect the fair market value of the car or truck.
The new law also changes the tax treatment of large sport utility vehicles. Because the vehicle caps on depreciation do not apply to cars or trucks weighing more than 6,000 pounds, businesses could deduct up to the full cost of a large SUV. That tax break is over, but only in modified form. SUVs purchased after Oct. 22, 2004 and weighing more than 6,000 pounds, but not more than 14,000 pounds, are limited by a $25,000 cap.
Penalties on the rise
One way to pay for all these tax cuts is to increase penalties for tax avoidance. Individuals and businesses investing in tax shelters and other abusive transactions will now be liable for much higher penalties. Companies that promote these transactions also will be hit with very high penalties. If you've invested in any kind of tax shelter - any transaction that seems too good to be true - now is the time to voluntarily disclose that transaction to the IRS. Congress gave the IRS discretion to waive the harsh penalties, and the agency likely will for taxpayers who cooperate.
This column explores some of the highlights of the new law, however, there's much more, depending on your personal tax situation. You'll want to make sure your personal tax planning, especially your charitable donations, do not run afoul of the new law. You should consult your tax certified public accountant.
Allen Bingham is a partner in the firm of Mikunda, Cottrell & Co. with more than 25 years of experience in public accounting. He specializes in income tax and estate planning. He was a partner in an international accounting firm for 15 years.
