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Articles Fuel Problems Mean Tax
Benefits (09-05) Identity Theft: The
New Financial Nightmare (08-05) Maximizing
Your Business (05-05) LLC, S CORP., & C
CORP.: WHAT’S THE DIFFERENCE? (05-03) American
Jobs Creation Act: Explanation and Strategies (04-12) Conditions
Favorable: Consider Selling Your Business Now (04-12) EXIT PLANS: HAVING ONE IS
ALWAYS IMPORTANT (04-11) Is There “Value”
in a “Valuation”? Part 2 (04-08) |
American Jobs
Creation Act: Explanation and Strategies By: Bart A. Basi
& Marcus S. Renwick INTRODUCTION Be aware! The
American Jobs Creation Act of 2004 became law as of October 22, 2004. Because of this new act, business taxpayers
have new opportunities to cut their tax burden. This article will describe major portions
of the act and describe useful strategies to utilize the Act to your
advantage. The
benefits of this tax bill are more targeted than its predecessors. An example of this involves
manufacturing. This Act makes a
vengeful attempt to help manufacturing through the use of lower rates. Along with the targeted benefits, the
American Jobs Creation Act of 2004 patches loopholes. The result will make the tax code more complex.
Let’s look at some details.
The American Jobs Creation Act is the fifth major
tax cut in four years and contains tax cuts of $145 billion. Unlike previous tax bills, this tax cut is projected
to be fully paid for within the 10-year budget period. The use of phase-ins and phase-outs were
once again used to achieve this balance.
Given the beating The Act lowers the tax rate for a number of years.
In 2005 and 2006, manufacturers will be allowed to deduct 3% of their income
against their federal income tax to achieve a lower rate. In 2007, 2008, and 2009, the rate will be
6%. In 2010, the rate will max out at
9%. The effect of the deductions is
that the top corporate rate will drop from 35% to 32%. Lawmakers have also expanded the definition of
“manufacturer” substantially to include many more businesses that were before
never thought of as manufacturers.
Manufacturers now include software, film, and even energy production,
but do not include companies that are involved in the transportation or
resale of the goods. Strategy: Manufacturing is not for everybody. However, if you are interested in starting
or investing in a manufacturing business, now may be the time to do so. The low tax rates will result in both lower
taxes and higher returns on investment.
Additionally, it may be advantageous to open a C Corporation to
manufacture goods. Because the tax
treatment may be more favorable than that of other types of businesses, C
Corporations may see a surge in number. |
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Congress has extended the $100,000 Section 179
deduction through 2007. Without the deduction,
the provision would have only been in effect until December 2005. Strategy: It
is still a good time to buy equipment.
If you are faced with a tax liability, try to eliminate it with a
large purchase of equipment for your business.
When Congress passed a cap limiting the amount
companies can deduct for automobiles, Congress never anticipated large SUVs
becoming popular. The result was a
loophole allowing business owners to deduct the purchase of large SUVs, but
not allowing them to deduct economical automobiles. Formerly, businesses could take advantage
of this loophole if the gross capacity of the vehicle was over 6000
pounds. No longer is that the case. Congress has now lifted the gross vehicle
weight of a vehicle to 14,000 pounds to qualify for an immediate deduction. Strategy:
This loophole is not entirely
closed. Certainly vehicles such as
Hummers, Suburbans, and other large SUV’s have been
eliminated from the list of vehicles which can be deducted. However, Congress neglected the fact that
ultra large SUV’s have made their debut.
Though it may seem ridiculous, Freightliner and International have
SUV’s with gross vehicle weights of over 14,000 pounds. The price tags on these vehicles range
upwards of $80,000. Though it may seem
ludicrous to buy one of these vehicles, they get excellent gas mileage, have
excellent resale value, are safe, and qualify for the tax deduction. As a result, the cash flow cost to you is
reduced to $53,000, disregarding the resale or trade-in value. If these
ultra large SUV’s do not suit your business, you can still take deductions
for vehicles if they relate to your business no matter what their gross
weight is. Such examples include
hearses for funeral homes, trucks with gross vehicle weights of under 14,000 pounds in a mechanic’s business, and other
specialty vehicles if they relate to a business.
S Corporations have also been reformed. The number of owners now able to own one S
Corporation has been increased from 75 to 100. All family members in one family are
considered to be one shareholder. This
is good news in light of the proliferation of Subchapter S Corporations and
the growth that they have seen over the years. Strategy: S Corporations are still a good idea! Opening one today and selling investments
to partners is a good idea.
In a surprise move, Congress has made states’ sales
taxes deductible. Taxpayers must
itemize to get the deduction just as they have had to do state and local
income taxes. Taxpayers can either
substantiate the expense with receipts or use tables. The sales tax deduction is now an
alternative to deducting state income taxes Strategy: This provision is relatively useless if you
live in a state with an income tax. However,
if you live in a state with an income tax, you can still take special
advantage of this provision. You can
do this by making a purchase of a large product this year, such as a yacht,
plane, or large camper.
Farmers also benefit from this bill. When weather forces farmers to sell
livestock prematurely, farmers now have four years to defer gains instead of
having to book the revenue within two years.
Farmers are also allowed special averaging for the Alternative Minimum
Tax. In a more controversial move,
Congress has added a $10 billion buyout for tobacco farmers.
As part of their major crack-down on tax shelters,
Congress has made substantial penalties higher than what they were
previously. The statute of limitations
has been extended and other rules to break abusive shelters have been
established. Strategy: If you are
in an illegal tax shelter, get out of it.
Granted, the time for forgiveness from the IRS has passed, but dealing
with these situations actively as opposed to passively is a strategic
advantage in this situation.
Partnerships have been the most affected by direct
provisions of the Act. The Act no longer
allows partnerships to shift built in losses to subsidiaries. In the event an asset is transferred or
distributed to a partner, the basis of the assets must be adjusted. There has also been some confusion as to whether
the partnership must recognize discharge of indebtedness as income. The answer throughout the Act is now a
resounding yes. Strategy: While it
may be convenient to use partnerships for tax strategies, only use
partnerships for legitimate business purposes. There are other ways to take losses and
gains while minimizing tax liabilities. Concluding Remarks Through
the American Jobs Creation Act of 2004, Congress has created this rule with
the purpose of targeting particular issues.
Consequently this Act has added quite a bit of complexity to the tax
code. Contact the professionals at The
Center for further assistance regarding administration and tax planning if
needed. |
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The
Center for Financial, Legal and Tax Planning, Inc. |
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Satellite Office: Longboat Key, FL |
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(618) 997-3436 Fax: (618) 997-8370 © Copyright 2005. All rights reserved. |
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