New Tax Laws Enacted in 2004

David Perkins

Two thousand and four was once again an eventful year for tax legislation. The Working Families Tax Relief Act of 2004 was signed into law in September, and the American Jobs Creation Act of 2004 was on the President’s desk awaiting signature as this issue was being printed. Here is a summary of the most significant provisions as they relate to you, the owner of a private business:

• Manufacturers engaged in “domestic production” will receive a new tax break beginning in 2005. It comes in the form of a tax deduction equal to 3% of manufacturing income in 2005 and 2006; 6% in 2007, 2008 and 2009; and 9% in 2010 and beyond. The definition of manufacturing is very broad and includes publishers, oil and gas production companies, software producers, farmers, meat processing companies, construction companies, and  architecture and engineering companies. See your tax advisor to determine if you qualify.

• Automobiles that weigh more than 6,000 pounds have been exempt from strict limits on section 179 expensing. This enabled businesses to deduct up to the full cost of such “SUVs” in the year of purchase. The new law caps — beginning the day President Bush signs the American Jobs Creation Act of 2004 into law — section 179 expensing at $25,000 for vehicles that weigh less than 14,000 pounds but more than 6,000 pounds. For vehicles that weight less than 6,000 pounds, the cap remains at $2,960 (not including bonus depreciation, which expires Dec. 31, 2004).

• Improvements made by lessor or lessee before Jan. 1, 2006 to the interior of nonresidential real property more than three years after the building was placed in service may be depreciated over a 15-year life (straight line) rather than the regular 39-year requirement. Such expenditures also become eligible for first-year bonus deprecation.

• Individual taxpayers may — in 2004 and 2005 — deduct state and local sales taxes on their federal tax returns. More particularly, individual taxpayers and local income taxes (but not both). This provision requires the taxpayer to itemize (as opposed to taking the standard deduction), and will primarily benefit residents of states that do not have a state income tax such as Texas, Florida, Washington and South Dakota.

Note 1: If you didn’t keep all your receipts in 2004 and/or don’t want to tally up all the sales tax that you paid (who would?), the IRS will provide you with estimation tables.

AMT: Sorry, but this potential windfall might blow you straight into the AMT trap as this provision does not allow the deduction of state and local income tax for alternative-minimum tax (AMT) purposes.

The special 50% bonus depreciation allowance expires Dec. 31, 2004. If you are considering making capital expenditures in the near future, talk to your tax advisor about any potential benefit of meeting the year-end deadline. Remember, to qualify for additional depreciation amounts under the bonus provision, assets must be purchased and placed in service on or before Dec. 31, 2004.