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October 2003 2003 Tax Legislation -- Tax Breaks for Business
• An
increase in bonus depreciation to 50 percent for assets first put
into service on or after May 6, 2003 and before January
1, 2005; Although business owners are always looking for a way to reduce their taxes, the passage of this new tax law is not just a time for celebration. It's also time for strategic planning. All of the tax breaks are temporary. In addition, the effective dates of the new tax cuts, and their sunset dates, are intertwined with the Economic Growth and Tax Reconciliation Act of 2001 (EGTRRA) and the Job Creation and Worker Assistance Act of 2002 (JCWA). The new law may also impact your choice of business entity. Reducing individual marginal tax rates, while corporate rates stay the same, will tend to make partnerships and limited liability companies more attractive. At the same time, a maximum dividend tax rate of 15 percent combined with a top corporate rate of 35 percent leaves a potential 50-percent tax on income earned at the corporate level. The attractiveness of pass-through entities may depend on how successful corporations are in passing dividends through to shareholders. However, long-term planning is hindered by JGTRRA's sunset provisions. Depreciation bonus. The increase in the depreciation bonus to 50 percent is an extension of JCWA's 30-percent first year depreciation bonus. The 50-percent bonus applies to property placed in service on or after May 6, 2003, and before January 1, 2005. The 50-percent bonus is on top of the regular first year depreciation. Extension of first year bonus depreciation should reduce business expenditures that would have been made this year to take advantage of the expiring 30-percent bonus. Property does not qualify for the 50 percent level of bonus depreciation if its acquisition was the subject of a binding written contract entered into before May 6, 2003. Taxpayers cannot take JCWA's 30-percent and JGTRRA's 50-percent bonus on the same property at the same time. The new law also allows taxpayers to "elect out" of bonus depreciation. We can help you calculate the tax benefits of either taking or electing out of the bonus. Small business expensing. JGTRRA increases the amount a small business can expense in a particular year from $25,000 to $100,000. For purposes of the phase-out of the deductible amount, the current $200,000 ceiling is increased to $400,000. Property must be placed in service in 2003, 2004, and 2005. Combining bonus depreciation with increased expensing can generate some significant tax savings. Small business owners will tend to achieve the maximum benefit by expensing purchases of used assets, while saving bonus depreciation for purchases of new assets. In both cases, assets with longer depreciable lives generally should be selected first. Businesses need to act fast to take full advantage of bonus depreciation and increased expensing. You should review your current tax strategies. We can meet with you to go over your complete tax picture and help you determine how these new incentives can minimize your tax liability. Dividend rate cut. The big question about the dividend tax rate cut is how will corporations respond? It appears likely that corporations will initiate or increase dividend payments in the hope of attracting capital, raising their stock price and, therefore, making it easier to attract equity capital. However, the six-year sunset provision may discourage corporations from moving quickly. Closely-held corporations, which traditionally extract funds in the form of compensation, rather than dividends, have new options. Compensation will still receive a corporate level deduction while dividends will not. However, compensation is taxed as high as 35 percent. Dividends, under the new law, will be taxed at 15 percent. Marginal rate cuts. Unincorporated businesses will receive direct tax benefits from the decrease in marginal tax rates. The Treasury Department estimates that 80 percent of the benefit from the lowering of the highest marginal rate to 35 percent will go to business owners. If your business is a traditional C corporation, the lowering of the individual marginal rates may trigger you to think about whether you want to convert your business to another business form, such as a partnership or S corp because the corporate tax rates are no longer a bargain compared to the individual rates. The change in the marginal rates will also mean that your business will have to conform its payroll practices to incorporate the lesser amounts required to be withheld from employees' paychecks. You have many decisions to make in connection with the passage of this important new legislation. The amount of taxes that your business can potentially save by taking advantage of these provisions could enable you to undertake other projects or acquisitions. We can help you map out a strategy to deal with the new rules and their impact, as well as helping you make the most tax-savvy decisions so your business can grow. Contact us today for an appointment to go over your strategy.
The new 2003 tax law is called the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA'03). Although President Bush did not get his entire wish list of over $700 billion in tax breaks, JGTRRA'03 provides approximately $350 billion in tax relief--amounting to the third largest tax cut in U.S. history. Although the
timing of JGTRRA'03 may have come as surprise, it is a pleasant
surprise that will give you and your family more disposable income
this year and give you a smaller bill when tax time rolls around
next year. •
Lowering the rate at which you must pay taxes on both earned
income and investment income, including income from
capital gains and stock dividends; All of these benefits are temporary and many expire in 2005. However, a future Congress could make them permanent. Many of these benefits are retroactive to January 1, 2003. Here's a more in depth summary of each of the benefits the new law will provide you and your family. Lowering marginal tax rates. The tax law Congress passed in 2001, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), put into place a phase-in of decreasing tax rates beginning in 2001 and ending in 2010. The rates scheduled to be effective for 2003 were 10, 15, 27, 35, and 38.6 percent. JGTRRA'03 accelerates the rates that were not supposed to be effective until 2006. The new rates for 2003 (retroactive to January 1, 2003) are 10, 15, 25, 33, and 35 percent. The new rates allow you to adjust the amount you have withheld from your paycheck to reflect both the retroactive and the prospective benefits of the tax rate. This measure alone will provide you with more money which you can choose to either spend or save. In fact, you could get a double tax break by taking this money at the end of the year and investing it in an IRA or a SEP (if you are a sole proprietor). Expansion of the 10% marginal rate. In addition to the across-the-board lowering of the marginal rates, JGTRRA'03 expands the outer income limits of the 10 percent tax rate in 2003 and 2004. The outer limit for the 10 percent rate for single taxpayers increases from $6,000 to $7,000. For married taxpayers filing joint returns, the outer limit for the 10 percent rate increases from $12,000 to $14,000. Increase in child tax credit. JGTRRA'03 increases the child credit from $600 to $1,000 for 2003 and 2004. It also promises that those with eligible children will receive a rebate check in the amount of the increase in the credit ($400) in 2003. In 2005, the credit is scheduled to fall to $700. Marriage penalty relief. Marriage penalty relief was enacted under EGTRRA but it had a delayed and phased-in effective date. JGTRRA'03 immediately increases the standard deduction for married couples filing joint returns to twice the standard deduction for single taxpayers for 2003 and 2004. In 2005, the standard deduction for joint filers drops to 174 percent of the single taxpayer standard deduction. Additionally, the new law accelerates expansion of the income range for the 15 percent tax rate for joint return filers. AMT relief. For 2003 and 2004, JGTRRA'03 provides additional relief from the alternative minimum tax by increasing the alternative minimum tax (AMT) exemption for married couples filing jointly and surviving spouses to $58,000 and for single filers to $40,250. Nevertheless, the principal reason for this relief is to balance out the tax benefits in JGTRRA'03 that otherwise would subject many more taxpayers to the AMT. It does not solve the underlying problem that pushes a greater number of middle and upper-middle class taxpayers into the AMT each year. The immediate solution continues to lie in careful tax planning. Capital gains. For transactions occurring on or after May 6, 2003 through December 31, 2008, the capital gains tax rate is lowered from 20 to 15 percent. For transactions on or after May 6, 2003 through December 31, 2007, the capital gains rate is lowered from 10 to five percent for individuals in the lower tax brackets. The five percent rate falls to zero percent in 2008. Certain capital assets, however, remain subject to the top capital gains rate of 28 percent. Stock dividends. For 2003-2008, the tax rate on qualified stock dividends is 15 percent for most taxpayers. For taxpayers in the 10 and 15 percent brackets, the tax rate on stock dividends for 2003-2007 is five percent, with the rate falling to zero in 2008. However, major questions are developing over exactly what corporate distributions will be considered "dividends" qualifying for the reduced rates. Many taxpayers, both corporations and their shareholders, will need to follow a set of complex rules under the new law in order to be safe.
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