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Michael Gray, CPA's Tax and Business Insight

October 18, 2004

© 2004 by Michael C. Gray

ISSN 1539-395X

A monthly report to help you prepare for your financial future, keep more of what you earn by minimizing your taxes, and build an extraordinary business!

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Table of Contents

• Introduction.
• Manufacturers' deduction.
• Small business expensing deduction.
• SUV deductions.
• Bonus depreciation.
• S corporation reform.
• State sales tax deduction.
• Charitable contributions of vehicles.
• Company aircraft.
• Do you have employee stock options?
• PS Marché Aux Fleurs
• Subscribe/Unsubscribe from Michael Gray, CPA's Tax & Business Insight

Introduction

Janet and I will be leaving on Wednesday for our vacation and will return on November 8. This is an alert for the American Jobs Creation Act of 2004, passed by Congress last week.

I only have time to tell you a few highlights. You must consult with your tax advisor for details. My one-sided copy of the conference committee report is three inches thick, so this has to be very condensed.

The legislation was initiated to replace the incentive system for U.S. exports, which the World Trade Organization said violated the GATT international guidelines. As usual with tax legislation, "the devil is in the details." There are many provisions in the tax law that aren't related to international trade.

As I read the committee report, I was struck by effective dates and sunset dates for most provisions. In other words, many of the provisions are effective for only a few years. This is going to make it very difficult to plan and to comply with the rules, even for tax advisors who study them. We have to look up what rules apply for the period in question.

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Manufacturers' deduction.

The major replacement for international trade incentives is a deduction for domestic manufacturers. The deduction may be claimed by corporations, individuals, partnerships, estates, trusts and cooperatives. When fully phased in by 2010, the deduction will be 9% of the lesser of (1) income from qualified production activities for the year, or (2) taxable income for the year. The deduction is limited to 50% of W-2 wages paid by the taxpayer during the tax year. The deduction will be 3% for 2005 and 2006 and 6% for 2007 through 2009. Notice the legislation is designed to encourage employment within the United States.

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Small business expensing deduction.

The $100,000 expense deduction was scheduled to fall back to $25,000 after 2005. Under the new tax law, the $100,000 limit is extended through 2007.

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SUV deductions.

Effective when the President signs the legislation (expected early in November), the deductions for depreciation and applying the expense election for Sport Utility Vehicles used more than 50% for business and weighing more than 6,000 pounds will be limited to $25,000. If you are considering buying one of these vehicles anyway, you might want to go ahead before the legislation is signed.

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Bonus depreciation.

Since it was omitted in the legislation, the 50% bonus depreciation deduction will expire on December 31, 2004. Remember to take advantage of this tax benefit before it expires.

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S corporation reform.

There are a number of provisions enhancing the tax benefits of S corporations. Members of a family may elect to be treated as one shareholder and the maximum number of shareholders is increased from 75 to 100. The changes are effective for tax years beginning after December 31, 2004.

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State sales tax deduction.

For tax years beginning after 2003 and before 2006, individual taxpayers will be able to elect to claim state sales taxes instead of state income taxes on their federal income tax returns. The IRS will publish tables to estimate the deduction. In addition, taxpayers will be able to make adjustments for major purchases, like an automobile.

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Charitable contributions of vehicles.

Effective for donations after December 31, 2004, the deduction for a charitable contribution of a vehicle will be limited. If the charity sells the vehicle without using it in any significant way or without improving the vehicle, the charitable deduction will be limited to the amount of the gross proceeds for the sale. If the charity keeps the vehicle for its own use, it must provide an acknowledgement to the donor as to the fair market value of the vehicle based on its actual condition.

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Company aircraft.

The new law closes a loophole for deductions for company aircraft used for personal purposes by executives. No deduction will be allowed for personal use of an aircraft by officers, directors or 10% or greater owners to the extent the expenses exceed the amount treated as compensation or includable income for that individual.

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If you have employee stock options, have you subscribed to Michael Gray, CPA's Option Alert?

To subscribe or review past issues, go to http://www.stockoptionadvisors.com/optionalert/.

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P.S.

My daughter and her husband, Holly and Dan Baker, have a Southern French Restaurant at 23 Ross Common, Ross, California, about 15 minutes north of the Golden Gate Bridge. The name of the restaurant is Marché Aux Fleurs and their website address is http://marcheauxfleursrestaurant.com. For the best meal of your life, call 415-925-9200 for a reservation and give them a try! For directions, visit our website at http://www.taxtrimmers.com/directions.shtml.

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P.P.S.

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IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.