 Congress
Approves American Jobs Creation Act of 2004
The American Jobs Creation Act of 2004 has passed
Congress and is on its way to the White House for
President Bush's signature. Highlights of the provisions
which are most likely to affect our clients and referral
sources are below.
STATE SALES TAX DEDUCTION
The new law allows individuals to deduct state sales
taxes instead of deducting state and local income taxes.
This election has been made available for tax years
beginning after 2003 and before 2006.
Taxpayers electing to deduct state and local sales taxes
paid will have two options - determine the deductible
amount by accumulating receipts or using tables to be
prepared by the Secretary of the Treasury based on
average consumption and other factors.
Congress realized that it was imposing a burden by
ordering the creation of these tables so close to the
end of the year and the beginning of filing season. As a
result, the conference report signaled that Congress
doesn't expect the Treasury to have the tables ready
before the 2005 filing season. What estimates will be
allowed for 2004 returns without these table remains to
be seen.
The new sales tax deduction is available not only to
taxpayers living in states without an income tax, but
also to those in any state who find that sales taxes
paid during the year (for example, for several major
purchases) exceed their state income tax liability for
the year. However, the new deduction is available only
for taxpayers that itemize their expenses. It is
important to keep in mind that the alternative minimum
tax (AMT) may eliminate any benefit provided by the
sales tax deduction provision. Taxpayers are not allowed
to deduct state and local taxes when computing the AMT.
SMALL BUSINESS
EXPENSING AND DEPRECIATION
Two years ago, Congress raised the threshold for small
business expensing from $25,000 to $100,000. This
special treatment is reduced when the cost of qualifying
property placed in service for the tax year exceeds
$400,000. The enhanced treatment was designed as a
temporary measure to stimulate the economy, falling back
to $25,000 in 2006. The new law extends the higher small
business expensing amounts through 2007.
Not only does the extension give taxpayers more
certainty in their planning, it also may indicate that
Congress may make the higher amounts permanent.
The threshold is indexed for inflation starting in 2004.
It is $102,000, with a $410,000 property cap for 2004.
This change carries through the indexing to 2007 as
well.
SUV deduction. Large sports utility vehicles will
no longer be able to be driven through a large tax
loophole by business owners. Because the vehicle caps on
depreciation do not apply to cars or trucks weighing
more than 6,000 pounds, taxpayers can deduct up to the
full cost of the SUV immediately as a section 179
deduction. Now, the deduction for vehicles weighing not
more than 14,000 pounds is capped at $25,000, effective
for property placed in service after the date of
enactment.
Owners of heavy SUVs still fare better than other
vehicle owners, however. First-year deduction amounts
for vehicles under 6,000 pounds currently are capped at
$2,960 (not counting bonus depreciation, which expires
this year)
Depreciation. Congress approved a 15-year
recovery period, using straight-line depreciation, for
qualified leasehold improvements to nonresidential real
property placed in service after the date of enactment
and before January 1, 2006. If the lessor made the
improvement, subsequent owners generally cannot use the
15-year period to depreciate the improvement.
Prior law required that a "qualified" leasehold
improvement or addition be depreciated using
straight-line depreciation over the same 39-year period
as nonresidential real property. A qualified leasehold
improvement is an improvement to the interior of a
building, made by either the lessor or lessee and placed
in service more than three years after the building is
placed in service.
The new law also provides a 15-year recovery period and
straight-line depreciation for qualified restaurant
property placed in service after the date of enactment
and before January 1, 2006. The property also becomes
eligible for first-year bonus depreciation. Qualified
restaurant property is a building improvement placed in
service more than three years after the building is
placed in service. The restaurant must use more than
half of the building's square footage.
The shorter recovery period and the availability of
bonus depreciation for restaurant property provide much
larger deductions in the first year.
If a leasehold improvement or restaurant property
qualifies as tangible personal property under existing
law, taxpayers can use cost segregation to depreciate
the elements separately over a shorter recovery period,
using bonus depreciation and an accelerated depreciation
method.
S CORPORATION REFORM
The new law dramatically changes the S corporation
rules. The permissible number of S corporation
shareholders increases from 75 to 100. Congress also
approved treating all members of a family as one S corp
shareholder.
"OTHER" REVENUE
PROVISIONS
Vehicle donations. Congress voted to limit the
deduction for vehicles contributed to charity. The
amount of deduction will depend on how the donee
organization uses the vehicle. If the charity sells the
vehicle without using the vehicle in any significant way
(or without improving the vehicle), the amount of the
charitable deduction cannot exceed the gross proceeds
from the sale. The taxpayer also must produce an
acknowledgment as to value from the charity if the
charity keeps the vehicle for its own use. Stiff
penalties will be imposed on charities that don't
approach this obligation honestly. The charity also is
required to pass along to the IRS the information in the
written contemporaneous acknowledgment that it is
required to give to the donor.
Vehicle donation programs are booming and many taxpayers
expect to write-off the full "blue book" value of their
old car or truck. The acknowledgment rule for
arm's-length sales applies for contributions made after
December 31, 2004.
Taxpayers who have inflated deductions in past years are
not home free. They still are required to substantiate
the value of their vehicle donation on audit of a return
for any open year.
Intellectual property
donations. Under the new rules, if a taxpayer
contributes a patent or other intellectual property
(other than certain copyrights or inventory) to a
charitable organization, the taxpayer's initial
charitable deduction is limited to the taxpayer's basis
in the contributed property or its fair market value,
whichever is less. The intellectual property donor is
allowed to take an additional charitable deduction based
on a specified percentage of the income the donee
receives with respect to the donated property. The
additional deduction can be taken either in the
contribution year or subsequent tax years. The amount of
any additional deduction is calculated on a sliding
scale. These new rules apply to contributions made after
June 3, 2004.
Company aircraft. The new law closes a loophole
in connection with the use of company aircraft by
executives. For officers, directors, and
10-percent-or-greater owners, no deduction will be
allowed for expenses for the use of a facility (such as
an airplane) in connection with a nonbusiness activity,
to the extent that the expenses exceed the amount
treated as compensation or includible income for that
individual.
Some S corporations had been passing through as
deductions the full cost of the use of corporate jets by
their executive/shareholders while the shareholder only
had to recognize the personal use in income using the
Standard Industry Fare Level (SIFL) mileage rate. That
technique is now halted.
The content of
this transmission does not constitute a professional
service. Always consult with a competent
professional service provider for advice on tax,
accounting, and other financial matters specific to
your situation. If you wish to engage our firm for
this purpose, please contact our office.
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