2004 Middle-Market Tax Update
Recent legislation from Congress has resulted in significant tax changes for businesses. There are a number of changes that may be beneficial for your company in 2004.
Increased bonus depreciation
The Jobs and Growth Tax Relief Reconciliation Act of 2003 built upon the thirty percent bonus depreciation deduction introduced in the previous tax act. Now companies may write off fifty percent of the cost of qualifying new assets acquired on or after May 6, 2003, and placed in service before Jan. 1, 2005. Property will not be eligible if a binding contract for its acquisition existed before May 6, 2003. Eligible property acquired before May 6, 2003 may still qualify for the 30 percent first-year bonus depreciation amount.
Increased expensing of qualified business assets
Eligible new and used property placed in service during 2003, 2004 and 2005 now qualifies for a $100,000 Section 179 deduction (up from the previous $25,000) in lieu of depreciation. Additionally, the $200,000 phase-out amount has increased to $400,000 for qualifying assets put in service during those years.
Faster depreciation adjustments
IRS Revenue Procedures 2002-18 and 2002-19 allow taxpayers to use depreciation deductions in a single year as long as these deductions have not been claimed in prior years. Adjustments to depreciation resulting from a cost-classification study and a change in accounting method can now be taken in the year of the change rather than being spread over four years, as was previously required.
"Simplified" LIFO
In 2002, the IRS relaxed its rules for companies using "simplified" LIFO, requiring less paperwork and offering benefits closer to "regular" LIFO. The simplified approach relies on the Inventory Price Index Computation (IPIC) method, which is based on industry indices published by the Bureau of Labor Statistics. This approach can help you streamline the necessary calculations and thereby save you a considerable amount of time and effort by reducing your administrative burden.
Pending Legislation
As Congress winds down its legislative session for the year, there is more potential for tax savings for businesses. Several pending pieces of legislation would create or extend tax incentives in 2004. Tax Relief Extension Act of 2003
The "Extenders Act" would extend a number of expiring tax incentives through the 2004 tax year. These incentives will likely have enough support in the House and Senate to keep them one more year, but not enough to make them permanent. One key provision of the bill would make net operating losses arising in tax years ending in 2003 eligible for the five-year extended carryback treatment. Other provisions include the extension of the Welfare-to-Work Tax Credit and the Work Opportunity Tax Credit through December 31, 2004.
Streamlined sales tax legislation
Legislation has been introduced in both the House and the Senate that would allow a member state of the Streamlined Sales and Use Tax Agreement to require out-of-state sellers to collect and remit sales and use tax on sales to purchasers in that state. The legislation contains a small-business exception requiring sellers in a small business to be compensated for the cost of administration and collection.
Corporate tax and ETI reforms
Congress has been under pressure to bring the U.S. into compliance with the World Trade Organization's ruling that the exclusion for extraterritorial income is a pro- hibited export subsidy. The WTO deadline for compliance is January 2004; however, the European Union could possibly delay sanctions until March.
The House and Senate have created legislation to replace the ETI exclusion with a variety of corporate tax reductions and tax reforms. The proposed bills have two key components, a rate reduction for corporations and sunset provisions that would phase out the ETI benefits. An alternative to the ETI is an Interest Charged Domestic International Sales Corporation, or ICDISK. The ICDISK is a form of export incentive in which the calculations are very similar to the ETI. In addition, the ICDISK has been in effect since 1984, and it has not received scrutiny from the WTO.
Warren Heatley is a partner and Kimberly Cofer is an associate in Grant Thornton's Kansas City reached at 816.412.2412.