2004 Year-End Tax Planning Booklet Supplement

Agency Sales,  Jan 2005  

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MANA and AIM/R communicated this supplement to the 2004 Year-End Tax Planning booklet via e'mail on November 23, 2004. In case you missed that notice, please copy these two pages and insert them into your booklet.

The provisions of two new tax laws enacted late in the year affect the content of our 2004 Year-End Tax Planning booklet. This supplement is intended to summarize some of the more important provisions of the American Jobs Creation Act of 2004 (AJCA) and the Working Families Tax Relief Act of 2004 (WFTRA) that could affect your 2004 planning.

Individual Tax Provisions

Itemized Deduction for Sales Taxes. For 2004 and 2005, AJCA provides individual taxpayers with a new deduction for state and local sales taxes paid during the year. Generally, a taxpayer has the choice of deducting state and local income taxes or state and local sales taxes. In deducting sales taxes, the taxpayer can use (1) actual taxes paid (from receipts, etc.) or (2) an amount taken from an 1RS table plus actual sales taxes paid on items like motor vehicles and boats. If you itemize deductions, make sure to consider which state tax deduction would benefit you the most.

Nonqualified Deferred Compensation. Nonqualified deferred compensation plans provide retirement benefits for executives above those available through regular company retirement plans. AJCA provides new rules for these plans, including a 20% penalty tax when the restrictions regarding taking money out of the plan are violated. The new rules apply to deferrals made after 2004 and to amounts deferred before 2005 if the plan is materially modified after October 3, 2004. If you currently have a nonqualified deferred compensation arrangement to which you defer income, you should find out whether the new rules will affect you.

Educators' Expense Deduction. Prior to 2004, eligible educators (K-12 teachers, principals and counselors, for instance) could claim a tax deduction for up to $250 of expenses for books, supplies, computer equipment, etc., they bought and used in the classroom. An educator could claim the deduction even if he or she did not itemize deductions, WFTRA extends the deduction for the 2004 and 2005 tax years.

Business Tax Provisions

Deduction for Domestic Production Activities. A provision that takes effect next year might have an impact on your business tax planning for the rest of 2004. AJCA provides a new tax deduction for a percentage of business income earned from manufacturing and certain other production activities occurring in the U.S. The deduction is available to regular C corporations, S corporations, partnerships, sole proprietorships, cooperatives, and estates and trusts. Very generally, the deduction equals a percentage (3% in 2005 and 2006) of the lesser of qualified production activities income or taxable income for the tax year. The deduction amount is further limited to 50% of the annual wages paid by the taxpayer (including deferrals under 401(k) and similar retirement plans). A broad range of "production activities" qualify for the deduction. This provision could affect your business' strategy of accelerating or deferring income and deductions in 2004.

S Corporation Reforms. An S corporation is one that elects to pass through all income, losses, deductions and credits to its shareholders, who then report those items on their own tax returns. Effective in 2005, AJCA makes several changes to the S corporation requirements, including increasing the number of eligible shareholders from 75 to 100 and allowing family members to elect to be treated as one shareholder for purposes of the limit. If you operate a business as an S corporation, it might be a good idea to become familiar with the new rules this year before they go into effect.

Extensions of Tax Credits. Under WFTRA, several business tax credits were extended. Among them: the Research Credit, the Work Opportunity Tax Credit, the Welfare to Work Credit, and the Credit for Producing Electricity from Renewable Resources.

Deduction for Organizational Expenses. Under AJCA, a corporation can elect to deduct up to $5,000 of organizational expenses (legal and accounting fees, incorporation fees, etc.) incurred in setting up the company. (Certain limits apply.) The non-deducted remaining expenses may be deducted ratably over 15 years. A similar deduction applies to start-up expenses (advertising, pre-operation salaries, etc.). The deductions apply to expenses paid or incurred after October 22, 2004.

Expensing of SUVs. The tax law's section 179 expensing election and an exception from the depreciation and expensing caps on "luxury cars" for heavy sport utility vehicles have prompted many businesses to purchase large SUVs for their executives and write off the full cost in the year of purchase. AJCA addresses this situation by limiting the section 179 expensing election for SUVs to $25,000 (from the normal election limit of $102,000 for 2004). The new rule is in effect for SUVs placed in service after October 22, 2004.