The season is almost officially upon us, so let the hustle and bustle begin. Unfortunately, this season doesn't involve presents or pretty wrapping – we are talking about tax season.
President George W. Bush recently signed into law two new tax bills: the "The American Jobs Creation Act of 2004" and "The Working Families Tax Relief Act of 2004." Together, the new bills offer tax incentives to individuals and promise changes for businesses as well.
"Before the year closes, business owners have an opportunity to fine tune their tax strategy for 2004 and plan their strategy for 2005," said Tony Grijalva, of G&A Partners, a fully-integrated Human Resource and Administrative services company that offers businesses financial and accounting assistance.
With more than 600 pages between the two new tax codes, a summary can barely scratch the surface so business owners should consult an expert to determine how the changes may impact their companies. That said however, we do want to spotlight a few items that may be of particular interest to growing businesses.
BUSINESSES
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Increase in Section 179 Expensing. Section 179 of the tax code allows business owners to immediately deduct the cost of many business assets. For 2005, the maximum dollar amount that may be deducted under Section 179 has increased to $105,000 from $102,000 for 2004. This increased deduction has been extended to 2007, with adjustments for inflation.
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S Corporation Reform. Many people chose to operate their businesses as C corporations because they combine the best of corporations and partnerships. S corporations, however, are one of the fastest growing business entities in the U.S. Instead of 75 shareholders, S corporations can now have 100 shareholders. One family can also elect to be treated as a single shareholder. For those starting a business or thinking of converting a business to a different structure, the new rules make S corporations more attractive. Business owners should compare the advantages and disadvantages of different business entities to determine which one best fits their needs.
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New Deduction for U.S. Production Activities. In an effort to keep jobs in the States, the "Jobs Act" creates a new tax deduction that allows US companies' engaged in domestic production activities to deduct a percentage of the net income earned from those activities: 3 percent in 2005-2006; 6 percent for 2007-2009; and 9 percent beyond 2009. This is subject to several limitations, so businesses will want to consult a tax expert to be sure they are applying the deductions correctly.
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Health Savings Accounts (HSAs). With health insurance costs on the rise, HSAs are relatively new tax-exempt savings plans that are available to individuals covered under a high insurance deductible plan (defined by a deductible of at least $1,000 for self-coverage or at least $2,000 for family coverage.) HSAs are tax-exempt trust or custodial accounts created to pay for qualified medical expenses of the account holder, as well as his or her spouse, and dependants. HSAs are subject to rules similar to those applicable to Individual Retirement Accounts (IRAs).
The employee or employer, or both can make contributions for eligible individuals who are employees. Contributions are deductible if made by an eligible individual and are excludable from gross income and wages for employment tax purposes if made by the employer.
Earnings grow tax-deferred, and distributions are not includible in gross income if made for qualified medical expenses.
- Standard Mileage Rate. Due to the high cost of gasoline, the standard mileage rate has seen its largest increase ever rising three cents to 40.5 cents for 2005.
INDIVIDUALS
New Itemized Deductions for State and Local Sales Taxes. Under prior law, federal income tax filers who itemized their deductions could deduct state and local income and property taxes when computing their federal income tax, but could not deduct state and local sales taxes. Taxpayers in non-income tax states (Texas) argued that this differing tax treatment was unfair. Effective for 2004 and 2005, individuals who itemize will be able to deduct either state and local income taxes or state sales taxes on their federal tax returns. Individuals who take the sales tax option may deduct their actual sales taxes or use IRS-published tables.
This change will benefit individuals in states with sales taxes but with no or limited individual income taxes, such as Texas. Those individuals who live in states that impose both income taxes and sales taxes may also be affected. People who live in states that have both should determine whether their sales taxes for a particular year could exceed their income taxes for that year. In some cases, they may elect to plan to make major purchases in the same year, so that sales and use taxes for that year can exceed the income taxes paid for that year. By doing this, they can deduct their sales and use taxes in one year, and their income taxes in another year.
Tougher Rules for Charitable Donations of Vehicles Due to Abusive Deductions. There is a major change in rules regarding donations of autos after 2004. Currently, if a taxpayer donates a vehicle and it is categorized correctly for determination of value, the taxpayer may claim the "blue book" value. The taxpayer must substantiate the deduction by a written acknowledgement from the charity describing (but not valuing) the car and the acknowledgement does not have to be attached to the taxpayers return.
The rule for charitable contributions of vehicles (including boats and airplanes, but not inventory) has changed dramatically for 2005. After 2004, the deduction for any vehicle valued at $500 or more that is donated to a charity and resold by the charity will be limited to the gross proceeds received by the charity upon resale. The reason for this is that charities often sell vehicles at auctions or in bulk sales where the prices are substantially below "blue book," which can cause donor deductions to be greatly reduced. Different rules apply to charities that use the vehicle or materially improve the vehicle before reselling it.
Gift Tax Exclusion. The gift tax exclusion stays at $11,000 for gifts made in 2005. During a given year, an individual may gift $11,000 to any number of individual recipients. A married couple can effectively double that amount by each spouse gifting $11,000 to an individual recipient. Keep in mind, however, that the IRS has at times looked at additional gifts, such as graduation or Christmas gifts, to see if the gift exceeds the $11,000 limit. As long as the gift meets the limit requirement there are no tax consequences to the donor.
Tax Payment Reminders.
Individuals (including Sole Proprietors, S-Corporations, & Partnership owners) – The 4th Quarter payment will be due Monday, January 16, 2005.
Corporations – The Calendar Year Corporation 4th Quarter installment is due December 15, 2004.
Partnerships with Foreign Partners – The 4th Quarter partnership withholding tax payment is due December 15, 2004.
Penalties. To pay for all these tax cuts, Congress has increased penalties for tax avoidance. Individuals and businesses investing in questionable tax shelters or transactions may be liable for much higher penalties. Congress has given the IRS discretion to waive harsh penalties, and the agency will likely do so for taxpayers who voluntarily cooperate with the IRS. The penalties, however, are not only for tax shelters. Individuals and businesses that file bogus or frivolous returns also will be liable for monetary sanctions.
Like shaking a present before it is opened, this is merely a sneak peek at the new tax rules. If you want some more hints about what is wrapped up inside, contact G&A at (800) 253-8562.
Here's to a Happy Tax Season – Cheers!
