Tax Law Changes Provide Much Needed Relief to Businesses – Individual Taxpayers Also to Benefit.

 

Three for Three. Yep, for the third time in three years, Congress has passed a major tax bill. And this one is one heckuva tax bill. In fact, it’s the third largest tax cut in history. The bill provides some big-time tax relief for individuals and companies. So read on to find out how the new tax law will affect you and your company this year.

 

The Jobs and Growth Tax Relief Reconciliation Act of 2003 was signed into law by President Bush on May 28, 2003.  The new tax cuts are intended to stimulate consumer and business spending to jumpstart a still sluggish economy.

 

On the business-side, the so-called “Section 179 expense election” is increased from $25,000 to $100,000 for assets placed in service anytime in 2003, 2004 and 2005. Now that’s quite a jump. When an asset is “expensed” or “written-off”, it reduces taxable income directly, however; if an asset is “depreciated” only a portion of its cost is expensed each year, usually over 5 or 7 years for most business assets.  So, it’s usually beneficial to “write-off” more of the asset’s cost up front to lower taxes sooner rather than later. For example, an additional $75,000 tax deduction on your 2003 tax return could mean up to $22,500 in lower taxes this year, assuming a 30% tax rate.

 

It gets even better. The new tax bill includes a 50% first year “bonus depreciation” deduction for new assets placed in service after May 5, 2003 and before January 1, 2005. That’s a nice bonus. Better yet, the bonus depreciation amount is in addition to the Section 179 deduction mentioned above.

 

Here’s an example. Let’s say your company purchases some new equipment costing $250,000. First off, $100,000 would be expensed under Section 179. Next, you get an additional $75,000 in bonus depreciation ($250,000-$100,000 times 50%). Then there’s the regular depreciation on the remaining $75,000 cost basis ($250,000-$100,000-$75,000).  In this example, assuming this is a 5-year asset, regular depreciation would be $15,000.  If my math is correct, that’s a total first year write-off of $190,000 or 76% of the total cost. Using that same 30% tax rate, that’s $57,000 in lower taxes this year. As Latka Gravis from the Taxi television show would say, “thank you very much!”

 

I should note that not all assets qualify for both the Section 179 deduction and the bonus depreciation.  Also, the bonus depreciation applies to vehicles subject to the so-called “luxury cars” limits. Call your friendly CPA for more specifics.

 

So whadaya think so far? Well, you may want to rethink some capital spending decisions.  If you have been putting off the purchase of machinery and equipment, now may be the time to invest. Most of the new provisions expire within 3 to 6 years under various “sunset” provisions.

 

If you’re having a profitable year, here’s a chance to cut your tax bill and estimated tax payments right now. On the other hand, if you expect a loss this year because of the soft economy, here’s a chance to increase your tax loss. That loss can be “carried back” to prior profitable years. The end result could be a healthy tax refund of the taxes you paid in those profitable years.

 

How about this? If you manufacture or distribute capital goods, talk to your sales people. Make sure they know about these changes and use this as part of your sales presentation. Make sure your customers know there’s a window of opportunity for big upfront tax deductions on capital expenditures. That window is here for just a few years, and there’s always the risk that Congress changes the law next year or the year after that (you know they’ve done that before!). 

 

On the personal side, the bill includes quite a few goodies to put more money in consumer hands. This includes lower tax brackets, a reduced capital gains rate, a lower dividend income tax rate and higher child tax credits. Taxpayers will be able to adjust withholding soon and bring home more money with each paycheck or receive a larger tax refund at filing time next year.

 

Tax rates will generally fall about two percent. For example, the 35% bracket is lowered to 33% and the top bracket is lowered from 38.6% to 35%. All of the tax rate changes are retroactive to January 1, 2003 but will revert back to the old rates in 2010. 

 

Capital gains rates are reduced from 20% (if the investment is held for more than one year) to 15% for sales effective after May 6^th, 2003 and through December 31^st, 2007 for most taxpayers.

 

Dividend income you receive will likely be taxed at a maximum rate of 15%.  This tax treatment of dividends is retroactive but will terminate on December 31, 2008.  I should note that certain dividends may not qualify for such reduced rate treatment.

 

Other changes include the elimination of the marriage penalty and the increase of the child tax credit form $600 to $1,000. Taxpayers that claimed a child tax credit on their 2002 tax return will receive a check from the government of up to $400 per child.

 

This article is only a brief overview of the new tax bill. The new law is complex with special rules, qualifiers, exceptions and sunset dates. Consult with your tax advisor to learn more about how the new law will affect you.

 

 

Jerry Lopatka is a principal at the accounting and consulting firm of Dugan & Lopatka, CPA’s, PC located in Wheaton, Illinois. (www.tdip.com)