Tax cuts: what’s in it for you?

Most of the news releases about the tax cuts enacted early this past summer have been devoted to tax cuts for individuals. We know individual tax rates have been cut and there are reductions in capital gains and dividend taxes. There are also increases in the child credit and a lessening of the marriage tax penalty.

Yet, what has been done for your business? Let’s take a look at what The Jobs and Growth Tax Relief Reconciliation Act of 2003 means for you, the business operator.

Expensing Equipment Costs. Businesses generally may elect to expense the cost of most new equipment up to a fixed annual amount, rather than deducting through depreciation over a period of years. Previously, capital expensing was allowed for up to $25,000 of new equipment. That allowance was reduced dollar for dollar by the amount the equipment purchase exceeded $200,000.

The new law increases that expensing allowance to $100,000, and the dollar-for-dollar reduction trigger has been doubled to $400,000. The new limits apply for purchases made after tax year 2002 and before 2006. The changes are scheduled to expire in 2006, reverting to the old $25,000/$200,000 rule.

The old rule that the expense deduction can’t exceed the year’s taxable income continues, but the excess can be carried over and deducted in later years.

Bonus Depreciation. New business equipment that is not expensed can qualify for bonus first-year depreciation. A bonus depreciation of 30 percent of the cost of the new equipment was originally enacted in response to the Sept. 11 terrorist attacks. The new tax laws raise that amount to 50 percent for new equipment bought and put into service after May 5, 2003 (and assuming there was no binding contract to buy before then) and before Jan. 1, 2005 (2006 for certain long-lived property).

The 50 percent-of-cost amount may be taken in full the first year and need not be prorated for the part of the year the property was in service. Regular depreciation, computed on the cost minus the 50 percent depreciation, is also allowed for the year.

Taxpayers may elect 30 percent depreciation instead of 50 percent, or no bonus depreciation. Elections of 30 percent or no bonus depreciation would typically be made when the taxpayer wishes to absorb an expiring net operating loss carryover, or to push more depreciation into a future year when the taxpayer expects to be in a higher tax bracket.

New Car Purchases. New cars used more than 50 percent for business benefit to a degree from this bonus depreciation. Changes in response to 9/11 allowed a special increase in first-year depreciation up to $4,600 (on top of an existing first-year allowance of $3,060 in 2002). The 2003 changes increase the depreciation to $7,650 for new cars put into service after May 5 of this year and before 2005.

Corporate Estimated Tax. 25 percent of the Sept. 15 estimated tax installment otherwise due from calendar year corporations is deferred until Oct. 1. This is a budgeting gimmick, shifting a bit more revenue into the U.S. government’s fiscal year beginning Oct. 1 (that much less, of course, in the preceding year). It gives corporations another 15 days’ use of the deferred amount.

State Conformity. Bonus tax depreciation and direct expensing will be expensive for states that conform to the federal law in taxing asset cost recovery. Although the new law contains $20 billion in direct state aid, some states may choose not to conform in order to avoid lost revenue for their strapped state budgets.

The differences between federal and state rules will require separate records and calculations for the life of the property acquired. For multi-state corporations, the variety of methods of accounting for cost recovery could be an accounting and tax compliance nightmare.

It is essential that you talk to your own tax advisor regarding state conformity issues and the Jobs and Growth Tax Relief Reconciliation Act, in general.