Numerous provisions of each act and their effective dates add more complexity to the tax law. The following is a summary of the most important changes and their effects on individuals and businesses.
* Section 179 expense. Section 179 of the Internal Revenue Code permits taxpayers to expense furniture and equipment in a business. The 2002 tax act increased the threshold $25,000, to $100,000. The $100,000 limit was set to expire at the end of last year, but the new tax law extended the $100,000 limit until Dec. 31, 2007, and indexed it for inflation beginning in 2004. The maximum expense for 2004 is $102,000.
* SUV loophole closed. Prior to Oct. 22, 2004, a taxpayer could purchase a business vehicle weighing more than 6,000 pounds and deduct up to $100,000 ($102,000 for 2004) of its cost. Beginning in 2005, a taxpayer who purchases a new SUV with a gross vehicle weight of more than 6,000 pounds and less than 14,000 pounds will be limited to a deduction of $25,000.
* New 15-year recovery period. This allows qualified leasehold improvements and restaurant property placed in service after Oct. 22, 2004, and before Jan. 1, 2006, to be expensed over a 15-year period. Pre-law rules required a 39-year write-off period.
S Corporation reform
* One shareholder. A new election may be made to treat all family members that are shareholders in an S-Corporation as one shareholder.
* Maximum number of shareholders. The permissible number of shareholders increases from 75 to 100.
* Suspended losses can be transferred. S Corporation losses that were suspended due to the basis limitation rules can be transferred to a spouse or former spouse in divorce.
Other important changes
* Vehicle donations. The new law dramatically limits the deduction for vehicles contributed to charity. If the charity sells the vehicle without using it in any significant way or without improving it, the amount of the charitable deduction for the taxpayer cannot exceed the gross proceeds from the sale. If the charity keeps the vehicle for its own use, it must give a value for the donation to the taxpayer.
* State sales tax deduction. For taxpayers that itemize their deductions, the new law allows individuals to deduct state and local sales tax instead of deducting state and local income taxes. This new deduction will benefit taxpayers who live in states without an income tax or taxpayers in any state in which sales taxes paid during the year exceeds their state income tax liability.
* Child credit. Parents of children under age 17 can continue to claim a $1,000 child tax credit per child through 2010. This extends the old law that would have expired in 2005.
* Start-up expenses. Up to $5,000 of start-up expenditures is deductible in the year a new trade or business begins. The remaining costs are amortized over 180 months.
The above items are just some of the changes in the tax law from the Working Families Tax Relief Act of 2004 and American Jobs Creation Act of 2004. Consult with a certified public accountant to find out how the new laws may affect you.
Chad Kidney (firstname.lastname@example.org) works in the tax department at Tauber & Balser P.C. He has more than seven years of experience, with a concentration in taxation with small to mid-sized companies. He has also developed knowledge in cost segregation studies. Reach him at (404) 261-7200.