June 2003
By JAMES S. ANCHIN, CPA
The Jobs and Growth Tax Relief Reconciliation Act of 2003 (the Act) was signed into law on May 28, 2003 providing tax relief to both construction companies and their owners. The key aspects of the plan include: tax rate reduction acceleration, capital gains and dividend tax rate reduction and additional opportunities for business write-offs. Some of these provisions expire in future years. More than ever, careful review of your tax plan is required to maximize the benefits available to you under this act.
Tax Rate Cuts
and Bracket Expansion
The tax rate cuts and bracket expansion are effective retroactive to Jan. 1, 2003. The maximum rates were reduced from 38.6 percent to 35 percent, accelerating tax savings for high-income taxpayers. Lower brackets were reduced as well, providing savings for lower income filers, including children of high-income taxpayers. Careful planning to utilize these lower brackets is now more valuable than ever.
Based on these changes, taxpayers should review their 2003 estimated tax calculations. It may be beneficial to base your 2003 estimated tax payments on current year income and rates rather than your 2002 tax.
Additionally, because more taxpayers may become subject to Alternative Minimum Tax (AMT), a careful review of your tax situation is essential to saving tax. Proper planning and timing of certain deductions such as: state and local income taxes, real estate taxes and investment expenses are essential so that these deductions do not otherwise go to waste.
Dividend Tax Relief
Retroactive to Jan. 1, 2003, the tax on dividends has been reduced to a maximum rate of 15 percent (or five percent for lower income individuals) for regular tax and AMT purposes. This provision is scheduled to terminate at the end of 2008. For the reduced rate to apply, the dividends must be "qualified" and the underlying stock must meet certain holding period requirements. Many foreign dividends do not qualify.
Long-Term Capital Gains Rate Cut
Effective for sales and exchanges on or after May 6, 2003, net long-term capital gains will be taxed at 15 percent (five percent for lower bracket taxpayers) for regular tax and AMT purposes. This 15 percent rate will generally be in effect until Dec. 31, 2008. A separate 25 percent rate on the portion of the gain from real estate attributed to depreciation deductions remains, as does the 28 percent tax on gains from sales of collectibles.
The decreases in tax rates on capital gains and dividends warrant an immediate review of both investment and retirement strategies. For example, dividends and qualified capital gains generated within a retirement plan will be deferred until distributed; however they will ultimately be taxed at a maximum rate of 35 percent, which is well in excess of the new 15 percent rate. Investors may benefit by shifting interest-bearing investments into retirement plans and reallocating dividend and capital gain producing investments into accounts held individually. A fresh look at your entire strategy is warranted.
Additionally, business owners should update their analysis of the benefits of C Corporation versus S Corporation status. The tax law changes may change previous conclusions.
Increased
Deductions for New Equipment
The act increases the election to expense "qualified property" (IRC Section 179) from $25,000 to $100,000. The definition of "qualified property" remains essentially the same (machinery, equipment, transportation equipment, furniture, but not real estate); however, it now includes computer software (which previously had to be amortized over 36 months). The property can be expensed as long as total asset additions are less than $400,000 for the year, a generous increase over the previous limit of $200,000. This provision is effective for tax years beginning in 2003, 2004 and 2005. Fiscal year businesses should not immediately purchase section 179 property, as the business will not be eligible until the beginning of the 2003 fiscal year (i.e. a business with a September 30th year-end cannot use the benefits of this provision until October 2003). The dollar limitations will be increased for inflation in tax years 2004 and 2005.
The new law has not addressed the issue of the definition of a passenger automobile; therefore larger SUVs and pick-up trucks (those in excess of 6,000 pounds), if used in a trade or business, will qualify. To the extent used in a trade or business, the purchase cost of those vehicles, generally in the $50,000 to $80,000 range, can now be totally expensed in the year of purchase, significantly reducing the after-tax cost of these vehicles.
"Bonus" Depreciation Can Provide Tax Deduction Windfall
For new assets placed in service between May 6, 2003 and Dec. 31, 2004, 50 percent of the cost of the property may now be deducted as depreciation. This is an increase from the 30 percent "bonus" previously in effect. This provision also increases the first year depreciation deduction for new passenger automobiles (vehicles under 6,000 pounds) used in a trade or business from $7,660 to $10,710. As with the section 179 deduction, planning is advisable to determine if the benefits of the "bonus" depreciation apply when the purchase of the property is financed.
Gaining an Appreciation for Depreciation
With multiple classes of assets and separate rules regarding expensing, bonus depreciation and regular depreciation, significant benefits may be obtained by reviewing equipment and other asset acquisitions. Real property and leasehold improvements should be carefully analyzed in order to take advantage of the new provisions and maximize deductions.
Increase of AMT Exemption
Effective for 2003 and 2004, the AMT exemption amount has been increased. However, for many high-income earners subject to the AMT, the existing phase-out of the exemption will negate the benefits of this provision.
"Marriage Penalty" Relief
This provision encourages couples to stay united by increasing the standard deduction for married taxpayers to twice the standard deduction for individuals. Coupled with the increase in the size of the 15 percent bracket discussed above, these provisions have been called "marriage penalty relief." However, for those who file jointly and itemize their deductions, there is no benefit.
Claim Your Savings
Don't let the complexity of the above provisions mask the opportunity for meaningful tax savings. The key will be careful advance planning and ongoing analysis of future changes and expiration of provisions. Consult with your tax advisor to determine how you can take advantage of the opportunities available in the new tax law.
About the author: Mr. Anchin is a managing partner of Anchin, Block & Anchin, LLP, a regional certified public accounting firm with offices in New York City and Westchester, that specializes in meeting the needs of contractors in the tri-state area.