Before adjourning prior to the November 2004 election, Congress passed two bills regarding taxes that are considered the most sweeping changes in the tax code since Congress passed the Taxpayer Relief Act of 1997.
The bill of most interest to business, the American Jobs Creation Act of 2004, began as a bill to help exporters but turned into a business incentives bill worth about $146 billion, said Jerry Levens, CPA, CFE, of Alexander, Van Loon, Sloan, Levens & Favre, PLLC, in Gulfport.
Levens said one of the issues he has been getting question about is regarding the expense allowances for trucks, vans or SUVs that weight more than 6,000 pounds. The “luxury car” rules of Code Sec. 280F place strict limits on the maximum amount of deprecation that can be taken on cars, trucks and vans. But those rules don’t apply to vehicles that weight more than 6,000 pounds.
If the vehicle weights more than 6,000 pounds and is used 100% for business, business owners can take an expense allowance of up to $102,000 for vehicles purchased before October 22, 2004. The allowance was set to expire, but now has been extended through 2007.
But for SUVs purchased after October 22, 2004, the maximum amount of depreciation that can be claimed on the vehicles is $25,000.
Small business owners were also concerned that a 2003 tax amendment allowing immediate expensing of qualified purchases would expire after 2005. However, the current limits have been have been extended through 2007. The lower limits will not apply until 2008. Levens said the $100,000 figure is subject to reduction if total investments exceed $400,000.
That rule was of particular interest to Mississippi manufacturers, who felt the provision was helpful in increasing sales.
Another rule change that impacts business is regarding deducting start-up and organizational expenses after October 22, 2004, said Vance Randall, CPA, of GranthamPoole Certified Public Accountants in Jackson.
“Prior to October 22, 2004, the law allowed these costs to be amortized over a 60-month period,” Randall said. “As of 10/22/04, taxpayers can elect to deduct up to $5,000 of start-up and organizational expenses for corporations and partnerships in the year the business begins. However, any costs that exceed $5,000 must be amortized over 15 years on a straight-line basis. In addition, the $5,000 allowance is reduced by the amount of cumulative start-up or organizational costs in excess of $50,000. For cumulative purposes, all start-up and organizational costs relating to a particular business (including costs prior to 10/22/04) are included in determining whether the cumulative costs exceed $50,000.”
The IRS has also revised Schedules K-1 returns for this year’s filing season. The IRS said the schedules have been simplified to reduce common errors and the burden associated with preparation and filing requirements. Income, deductions and credits from partnerships, S corporations and trusts are reported to investors on Schedules K-1. The IRS said the redesigned schedule features an improved layout similar to that of Form W-2 as well as streamlined instructions.
Approximately 25 million Schedules K-1 are filed each year, with the highest number filed by partnerships.
“The revisions to Schedules K-1 will reduce taxpayer or practitioner preparation time, increase quality and improve reporting accuracy,” said Larry Gray, governmental affairs liaison for the National Association of Tax Professionals. “The Schedules K-1 are now laid-out similar to a Form W-2. For example, a code for each amount to be reported in Box 13 ‘Other Deductions’ is listed on page two of Schedule K-1 (Form 1065) and is similar to the coding system used for Box 12 on Form W-2. By using the code information, the taxpayer or practitioner will know specifically where to correctly report the amount on the taxpayer’s Form 1040.”
But Randall said that while the IRS will have an easier time matching the numbers that appear on the K-1s to the returns, he would not say the forms have been simplified.
“The K-1’s appearance has changed dramatically,” Randall said. “In addition, there are codes to identify and describe various items listed on the K-1, which may confuse some taxpayers. These codes should be included in the K-1 instructions.”
Another change affecting businesses regards depreciation on non-residential property. There are new incentives to improve the interior of buildings. Either lessors or lessees of non-residential property can now use straight-line depreciation over a 15-year period. Before the law change, improvement had to be depreciated over a 39-year period.
There is also a change for 2004 regarding deductions for discrimination lawsuit costs. The new deduction is available for those who pay attorney’s fees and court costs in connection with discrimination suits. The IRS says that taxpayers can take the new deduction whether they itemize or not. The deduction cannot exceed the amount includible in income for the year on account of a judgment or settlement resulting from the discrimination claim.
“Generally, personal legal expenses are not deductible, but an employee who incurs legal expenses related to doing or keeping his job could deduct these expenses on Schedule A as a miscellaneous itemized deduction,” said Mark Green, IRS spokesman for Mississippi and Georgia. “However, under The American Jobs Creation Act of 2004, an individual with legal fees and court costs arising from a discrimination suit may deduct the costs directly from income on the front of the tax return; this is known as an above-the-line deduction.
“Under this new deduction, amounts paid for attorney’s fees and court costs are deductible in computing alternative minimum tax, and are not subject to the 2% floor on miscellaneous itemized deductions or the overall limitation on itemized deductions. The act, signed into law on October 22, 2004, describes the discrimination claims qualifying for this new deduction. Only costs paid after October 22, 2004, for judgments or settlements occurring after that date qualify for this deduction.”
Tax forms and preparation information is available on the Web site www.irs.gov. Printed copies of the forms and instructions are also available by calling the IRS at 1-800-829-3676.
Contact MBJ contributing writer Becky Gillette at email@example.com.