2004 Tax Law Developments
Volume 12, Number 48,
Issue 595
Though TaxFaxTM took a turn towards entrepreneurial writing in or about February 2003, I can't go all year without writing a few things about taxes. Over the next few weeks, I'll get back to substance and talk about some 2004 tax changes that I think are of interest.
On October 22, 2004, President Bush signed the "American Jobs Creation Act of 2004"(Jobs Act). It was a massive tax bill that impacts almost every facet of income taxation. This comes on the heels of the "Working Families Tax Relief Act of 2004" (a $146 billion tax relief bill signed into law on October 4, 2004). The American Jobs Creation Act of 2004 is being called the most significant reform of U.S. business taxation, in terms of both impact and number of provisions, since the Internal Revenue Code was revamped in 1986. The Jobs Act contains $145 billion of tax breaks. However, there are also $145 billion of revenue raisers in the bill to ensure that it is revenue neutral. So, taxpayers will see tax reductions in some areas and increased taxes in others.
Some of the significant provisions of these tax bills include: repeal of the controversial extraterritorial income (ETI) taxation regime; creation of a new business deduction for U.S. manufacturers and producers effectively reducing their income tax rate; extension of §179 expensing at the current levels for two more years; a reduction in depreciation for SUVs by limiting the §179 deduction to $25,000; increasing depreciation for qualified leasehold improvements and qualified restaurant improvements; changes in S corporation taxation rules (including expanding the permissible number of shareholders); tax relief for farmers and agricultural businesses; more stringent rules for deferred compensation plans; new penalties for tax shelters and other tax avoidance schemes (including leasing transactions); strict documentation rules and deduction limitations for charitable contributions of vehicles; deductions for state and local sales taxes in lieu of deductions for state and local income taxes; extension of many expired or expiring tax benefits; new rules reducing taxes for members of the military earning combat pay; and a new "qualifying child" definition for determining when a child and certain other relatives qualify as dependents.
This year has also produced many new regulations, rulings, and tax cases, including: final IRS regulations clarifying when an individual may use a portion of the home sale gain exclusion; rulings where IRS granted permission for an IRA rollover after 60 days; guidance on the new "health savings account;" tax relief for taxpayers in "presidentially declared disaster areas," new regulations on student loan interest; depreciation relief for certain business trucks and vans weighing 6,000 lbs. or less; regulations allowing retroactive §179 elections; regulations explaining the depreciation calculation after a tax-free exchange; procedures for electing S status for LLCs and partnerships; and much more!
As an example (to get us started) of how our tax system continues to succumb to special interest groups and the expense of making the entire system more complicated, Generally for 2004 and 2005, the Jobs Act allows you to elect to deduct EITHER state and local income taxes OR state and local sales taxes, as itemized deductions. If you elect to deduct sales taxes, your deduction is either 1) your actual sales taxes substantiated by receipts, or 2) an amount provided in IRS tables (based on your filing status, income, etc.), plus any sales tax you pay on the purchase of a motor vehicle, boat, or other items prescribed by the IRS. This new election will be particularly beneficial to the residents of states with little or no state income taxes or states where the state income tax rate is generally lower than the sales tax rate-Not Virginia. BUT, taking the sales tax deduction rather than the state income tax deduction may avoid including a state income tax refund in federal taxable income in a subsequent year.
David B. Robinson, CPA
This issue is dedicated to Gregory Mitchell, 52, who died November 19th after suffering a heart attack during a performance at the Kennedy Center.
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