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TAX ‘NIP & TUCK’ YEAR

Written By: Alan A. Lips, C.P.A.
Published By: Aventura News 
Date: December 2004

This country has not witnessed such dramatic changes in the tax code since the Reagan Administration. With the American Jobs Creation Act of 2004, recently signed by President Bush, the year 2004 could be termed the “Tax ‘Nip & Tuck’ Year.” The Act was originally intended to resolve a dispute with the World Trade Organization over tax breaks for American exporters. However, the act has taken a much broader scope that affects both individuals and businesses.

The most exciting change for individuals for 2004 & 2005 is that sales taxes will be deductible as an itemized deduction. There will be two ways to calculate the sales tax deduction – either deducting sales tax using actual amounts expended or using sales tax tables provided by the IRS. On the flip side, if you are planning to donate a vehicle to charity consider doing it in 2004. Starting in 2005, deductions for charitable contributions of vehicles valued over $500 are limited to the charity's sales proceeds.

The Act has a greater range of tax breaks and restrictions, for businesses, small business owners and executives.

For business owners who were planning to purchase a high priced SUV, the law has changed. The SUV loophole has been tightened so that business owners can no longer deduct the full cost of sports utility vehicles under the Code Section 179. Section 179 allows a full write-off for the first $100,000 of business depreciable property acquired during the year.  However, SUV’s will be allowed only $25,000 (Sec. 179) after the date of enactment but will be allowed bonus and regular depreciation from there.  So for those of you who were considering the purchase of a Range Rover of Porsche Cayenne simply for the tax benefit, understand the new rules before you make that purchase.

Executives should review their nonqualified deferred compensation arrangements immediately to determine the impact of the new rules. The nonqualified deferred compensation arrangements, typically set up to retain top executives, take a hit under the new law. The Act tightens up the rules governing when distributions from nonqualified plans will be allowed. In addition, the law provides for retroactive interest and a 20% penalty on early distributions that don’t meet the law’s requirements. The new rules apply to deferrals made after 2004 as well as to amounts deferred in tax years beginning before 2005 if the plan is materially modified after October 3, 2004 .

In 2005, manufacturers can take a brand new deduction of 3% to 9% from income of a portion of a manufacturer’s qualified production activities. While this Act is aimed at assisting manufacturers, the deduction will actually be available to a wide range of other businesses since the definition of a manufacturer for this purpose is greatly expanded. The excitement here in South Florida is the application of this deduction to those in the construction industry. With the ongoing record pace development, real estate developers, architects and engineers should be looking for generous tax savings with the new Act.