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Tax act spells relief for small business: take advantage of new tax regulations for businesses and individuals while they last

Tax act spells relief for small business: take advantage of new tax regulations for businesses and individuals while they last – Jobs and Growth Tax Relief Reconciliation Act of 2003

David Ressner

The Jobs and Growth Tax Relief Reconciliation Act of 2003–“JGTRRA” for short–will result in tax cuts of about $330 billion, a portion of which is aimed at small businesses like frame shops and galleries. Officially, the tax cuts are spread out over the next 10 years, but the reality is that they come heavily front-loaded. Most of the breaks are in the first two to five years, and then there are built-in “sunset” provisions for each, which causes the breaks to expire or revert to their pre-JGTRRA levels.

But if the provisions are extended beyond the terms in the legislation–which many experts think will happen–the total tax cut could reach more than $800 billion. Many Republican legislators are committed to doing just that. Senator Kay Bailey Hutchison (R-Texas) said, “We hope to not ‘sunset’ these tax cuts, but instead to allow them to go forward.”

Politics aside, the reductions in individual tax rates will help millions of small businesses that pay taxes at the individual rate, but the biggest business-related tax cuts involve an increase in the small business expensing election limit and an increase in the allowable bonus depreciation percentage.

The act increases a business’ ability to deduct most types of capital expenditures for the years 2003 to 2005. In those tax years, a business can deduct expenses up to $100,000 per year. The previous limit was $25,000 per year. During the same time period, small businesses may expense off-the-shelf computer software. Finally, business owners can make use of a bonus depreciation of 50 percent on qualifying equipment bought between May 5, 2003, and January 1, 2005. (For more information on capital deductions, see IRS Publication 946: How To Depreciate Property or Form 4562: Depreciation and Amortization, which is downloadable at www.IRS.gov).

The bottom line is that JGTRRA makes this a great time to make major investments in your business. For example, in 2003, for a sole proprietor in the 28-percent tax bracket, the net cost of making a $100,000 purchase is just $72,000. Capital expenses above $100,000 would then be depreciated like any other type of capital asset.

According to IRS Publication 946, eligible expenditures include tangible property used for manufacturing, production, transportation, communications or furnishing electricity, gas, water or sewage disposal. Examples of eligible expenses for frame shops are machinery, equipment, counters and signage.

Regarding individual tax rates, the reductions originally scheduled by the 2001 tax law have been accelerated. Under the law, the marginal tax rates on the top four income brackets drop by at least two percent, and the rates for the lowest two income brackets remain unchanged, although the bracket threshold for these levels has been raised. These changes are retroactive to January 1, 2003.

The child tax credit increases from $600 per year to $1,000 per year per child. As with the income tax, this is retroactive to cover the 2003 tax year. However, the $1,000 deduction is only for 2003 and 2004. It will fall to $700 in 2005 and then gradually rise again. Taxpayers who are entitled to the credit this year will receive an advance payment of the $400 increase in the form of rebate checks.

The “marriage penalty,” for 2003 and 2004 has been reduced, which gives married couples twice the standard deduction of single taxpayers.

As of May 6, 2003, the long-term capital gains rate for people in the 10 percent or 15 percent tax brackets will drop to five percent. In 2008, those people will have a capital gains rate of zero percent, and in 2009, their rate returns to the old, 10-percent level. Long-term capital gains apply only to those assets held more than 12 months.

Higher income taxpayers will see their long-term capital gains rate drop from the current 20 percent to 15 percent. The 15-percent rate will be in effect through the end of 2008, at which point it is scheduled to return to 20 percent. Keep in mind, no matter which tax bracket you’re in, if you incurred a long-term capital gain between January 1 and May 6, 2003, the old rates apply.

When it comes to dividends, most are now going to be taxed at the same rate as capital gains–five or 15 percent, depending on your tax bracket. The rule applies for the same time frame as for long-term capital gains–May 6, 2003, through Dec. 31, 2008. However, not all dividends are covered by the new lower rates. IRS Code Sections 246(c), 404(k), 501,521 and 591 identify which types of dividends qualify for the lower rates.

If you have a question about dividends or other tax matters, consult with a CPA or even the IRS–its representatives are actually very knowledgeable, patient and eager to help.

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