Tax Law Changes for 2005
by Dan Powers
Tax benefits have been extended for 2005:
Research & Development (R&D) tax credit;
Welfare-to-Work and Work opportunity tax credits;
Enhanced deduction for charitable contributions of qualified computers;
Contributions to Archer medical savings accounts
Congress got an early start to its New Year’s resolutions by passing two major pieces of tax legislation at the end of 2004. The Working Families Tax Relief Act of 2004 (WFTRA) contains $146 billion in tax cuts affecting both businesses and individuals. The American Jobs Creation Act of 2004 (AJCA) began as a bill to compensate exporters for the repeal of the extraterritorial income exclusion and expanded to include the most sweeping tax law changes to business taxation since the Code was overhauled in 1986.
The following summary highlights some of the tax law changes in 2005 for individuals and businesses.
Individuals
The expanded 10-percent tax bracket is now extended through 2010.
The Child Tax Credit continues at $1,000 per child through 2010.
The marriage penalty is reduced for joint filers by increasing both the amount of the standard deduction and the 15 percent bracket to twice the amount for single taxpayers through 2010.
Teacher’s unreimbursed classroom expenses continue to be deductible up to $250 in determining adjusted gross income (AGI) for 2005.
Higher alternative minimum tax (AMT) exemption amounts of $40,250 for single filers and $58,000 for joint filers continue through 2005 to allow Congress time to address the perceived AMT problem.
Individuals who itemize can elect to deduct state sales taxes instead of state income taxes for 2004 and 2005.
Charitable contributions of vehicles that are subsequently sold by the charity are limited to the gross proceeds from the sale.
Businesses
Domestic Production Activities Deduction, when fully phased in, effectively lowers the corporate income tax rate for domestic producers to a top rate of 32 percent from 35 percent. The deduction is calculated by multiplying a percentage by the net income of the taxpayer from qualified domestic production activities (or overall taxable income if it is less). The percentage is phased-in from three percent in 2005 and 2006, six percent in 2007–2009 and nine percent in 2010 and thereafter. To promote job growth, the deduction is limited to 50 percent of the taxpayer’s wages.
The deduction is not limited to corporate taxpayers, but is available to other business entities including sole proprietorships. As defined, “production” includes traditional manufacturing, construction, engineering, energy production, computer software development, films and videotapes, as well as processing of agriculture products.
FSC/ETI benefits are repealed on a gradual basis with taxpayers able to claim 100 percent of their FSC/ETI benefits in 2004, 80 percent in 2005 and 60 percent in 2006.
Except for certain noncommercial aircraft, bonus depreciation has not been extended and generally will not apply to assets placed in service after December 31, 2004.
Leasehold Improvements and Restaurant Property will have a temporarily shorter statutory life of 15 years.
Small business expensing of capital expenditures up to $100,000 (subject to phase-out above $400,000) is now extended through 2007. Both the qualifying expense and cap are indexed for inflation. They are $102,000 and $410,000 respectively for 2004.
Business owners of SUVs will no longer be able to deduct the full cost of the vehicle immediately as the Section 179 expense willbe limited to $25,000.
S Corporations for 2005 can now have up to 100 shareholders. Further, in computing the number of shareholders, a family may elect to treat all members of the same family as a single shareholder.
Taxpayers may deduct (subject to a phase-out) up to $5,000 of Start-Up and $5,000 of Organization Expenditures in the year the active trade or business begins. Amounts not expensed are amortized over 180 months.
Dan Powers is a partner at Grant Thornton LLP. He can be be reached at 816.412.2510 or at Dan.Powers@gt.com