Tax Reform for All Seasons

By Kathleen M. Donaghy, Best Software, Inc.

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The 108th Congress had a very busy September and October with a burst of new tax legislation passed in the Senate and House in the weeks and days leading up to the November 2004 election break. On September 23, 2004, the "Working Families Tax Relief Act of 2004" (H.R. 1308) was passed with a 339-65 vote in the House and a 92-3 vote in the Senate. This was signed into law by the President on October 4, 2004 at the South Suburban YMCA in Des Moines, Iowa. And one week later on October 11, 2004, the Senate passed the "American Jobs Creation Act of 2004" (H.R. 4520) by a vote of 69-17. The House had passed the measure by a vote of 280-141 just four days earlier. The President signed this into law on October 22, 2004.

"Working Families Tax Relief Act of 2004"

The "Working Families Tax Relief Act of 2004" was introduced in the House of Representatives on March 18, 2003 as the "Tax Relief, Simplification, and Equity Act of 2003." The journey and evolution of this bill was as long and varied as the final legislation itself. The name change is only a reflection of a portion of the provisions and technical corrections passed. H.R. 1308 lived up to its final name and provided tax relief for working families by keeping the child tax credit at $1,000 for 2005-2009, increasing the standard deduction for married taxpayers filing jointly, eliminating the marriage penalty in the 15-percent bracket, extending the 10% bracket increase and extending the AMT exemption for one year to 2005.

One of the business provisions within the "Working Families Tax Relief Act of 2004" directly affecting fixed assets is the extension of the shortened recovery periods for Indian Reservation property. The Omnibus Budget Reconciliation Act of 1993 contained a provision allowing for special accelerated recovery periods for property placed in service on an Indian Reservation after December 31, 1993 and prior to January 1, 2004. The Job Creation and Worker Assistance Act of 2002 extended this provision to property placed in service through December 31, 2004. Now the "Working Families Tax Relief Act of 2004" has extended it once again to property placed in service through December 31, 2005.

"American Jobs Creation Act of 2004"

The "American Jobs Creation Act of 2004" had humble origins in the FSC/ETI (foreign sales corporation/extraterritorial income) Repeal Bill. Originally the FSC/ETI was a bill that would compensate exporters for the repeal of a controversial $50-billion tax-based trade subsidy. The final jumbo piece of legislation is being called the most significant reform of U.S. business taxation since the Tax Reform Act of 1986 and contains $145 billion in business tax breaks.

Not surprisingly, the H.R. 4520 has almost as many benefactors as its 270 distinct provisions. In line to benefit from this bill are U.S. manufacturers with a new 9% tax deduction, multinational operations with the repeal of the FSC/ETI regime, agribusiness, energy companies, small businesses, farmers, real estate investors and specialized groups such as native Alaskan whalers, NASCAR race track groups and importers of Chinese ceiling fans. Also contained within the hundreds of pages of legislative language is a $10.14 billion buyout of the federal tobacco subsidy. In short, this bill has something for almost everyone.

The cornucopia of this legislative harvest was incredibly bountiful, producing the following provisions related to fixed assets:.

Extension of Increase in Section 179 Expense

Section 179 expense increased amounts (indexed for inflation) have been extended for an additional two years through 2007. The Section 179 expense limit for tax years 2005-2007 is $105,000 with the increased phase-out amount for property placed in service being $420,000. Section 179 expense is scheduled to drop down to $25,000 in 2008.

Change in Recovery Period for Qualified Leasehold Improvements

Qualified leasehold improvements and restaurant improvements placed in service after October 22, 2004 and before January 1, 2006 will now be classified as 15-year recovery property depreciated on a straight-line basis. Previously "qualified" leasehold improvements were depreciated over the same 39-year period as nonresidential real property.

Extension of Bonus Depreciation for Noncommercial Aircraft

The 50% bonus depreciation has been extended for noncommercial aircraft placed in service through December 31, 2005. Bonus depreciation, except for real property located within the New York Liberty Zone or property with a longer production life, was only available for property placed in service before January 1, 2005.

Section 179 Expense for Sport Utility Vehicles Limited

The SUV loophole has been closed by limiting the amount of Section 179 expense in a single year to $25,000 for property placed in service after October 22, 2004. Previously, the entire cost of a $100,000 Sport Utility Vehicle with a gross vehicle weight of more than 6,000 pounds potentially could have been taken as a Section 179 expense deduction. The intent of the original law to increase Section 179 expense was not to boost the sales of SUVs.

State Depreciation

Be sure to monitor your State to determine whether they will decouple from the extension of increased Section 179 expense and the extended bonus depreciation for noncommercial aircraft. The majority of states did not conform to the Job and Creation Worker Assistance Act of 2002 providing the 30% bonus depreciation or the Jobs and Growth Tax Relief Reconciliation Act of 2004 providing the 50% bonus depreciation and increased Section 179 expense. If your state does not allow these provisions, be sure to select a method other than a bonus method in your state book and/or only elect the allowable Section 179 expense for your state. Last year there was an override field added to the Form 4562 definition dialog allowing you the override the increased Section 179 phase-out amount.