Act Now on Deductions (James P. Weller Commentary)

President Bush signed The American Jobs Creation Act of 2004 into law on Oct. 22, and regardless of the November election’s outcome, businesses must consider the following in their tax strategies this year:

• Non-Qualified Deferred Compensation Plans. The Act tightens the rules, and eliminates some of the abuses that have taken place. If the Act’s requirements are not met, it can lead to the immediate taxation of deferred compensation for the current year and all preceding years. It is advisable to have a deferred-comp plan reviewed to make sure it meets all of the new requirements.

• Extension of $100,000 Expensing Election. The $100,000 expensing election for certain tangible personal property was scheduled to end for tax years beginning after Dec. 31, 2005. Thereafter, the expensing amount would drop to $25,000. The Act extends the $100,000 expensing election for two more years through 2007. The amount continues to be subject to annual inflation adjustments.

• Expensing the Cost of a Heavy Sports Utility Vehicle. Heavy SUVs (from 6,000 to 14,000 pounds gross vehicle weight) get special expensing treatment. The law allows owners to expense, rather than depreciate, up to a specified amount of these SUVs’ cost when they’re placed into service for the business during the tax year. The Act reduces the amount that can be expensed for heavy SUVs to $25,000 without annual inflation adjustments. But the $25,000 expensing cap does not impede depreciating remaining costs above that amount.

• Suspended “S” Corporation Losses. Whereas losses passed to shareholders from an “S” corporation could only be deducted to the extent of their basis in the “S” stock, the Act creates the ability to transfer income tax-free “S” stock to a spouse or former spouse pursuant to a divorce. Suspended losses for tax years beginning after Dec. 31 are eligible. You can enhance your ability to deduct suspended “S” losses by increasing your basis through loans or additional capital contributions to the corporation.

• Limit on the Number of “S” Shareholders. The number of eligible “S” shareholders was upped from 75 to 100 beginning after Dec. 31. It also allows family-member shareholders to elect to be counted as one shareholder.

There were also key changes impacting individuals, including:

• New Itemized Deduction for State and Local Sales Tax. In 2004 and 2005, an itemized deduction for state and local sales tax can be taken in lieu of the same for state and local income taxes. The amount of the deduction is based on either the actual sales tax receipts or tables that will be published by the Internal Revenue Service. In states like Texas, which does not have a state income tax, this new provision creates an itemized deduction.

• Amount of Charitable Deduction for Donation of Cars. Under current law, the deduction for a donation of a car to a qualified charity can be based on the “blue book” value. After 2004, and if the charity sells the car without using it, the deduction is limited to the amount of the sale’s gross proceeds. A written acknowledgement of the gift from the charity is now required in the same tax year the deduction is claimed.

• Deduction for Attorney Fees & Court Costs Attributable to Age, Sex, or Race Discrimination Suits. If a judgment or settlement is included in your gross income, the deduction for attorney fees and court costs is transformed from an itemized deduction into a deduction directly from gross income. The deduction is also now allowed for purposes of alternative minimum tax. But the new provision only applies to judgments and settlements occurring after the law’s enactment.

(James P. Weller is senior vice president and manager of Wealth Transfer Planning at Bank of Arkansas in Tulsa, Okla. The company operates three Northwest Arkansas locations in Fayetteville. He may be reached via e-mail at [email protected].)