Barry & Howard
pbs tax & bookkeeping service
As most of you know, on May 28, 2003, President Bush signed into law a new tax bill that takes effect this year. The following is a brief summary of the tax law changes.
Tax law changes for individuals
The tax rates for 2003 have been reduced, and the 10 percent tax bracket has been expanded. The maximum tax rate on capital gains has been reduced to 15 percent — 5 percent for taxpayers in the lower brackets for any assets sold after May 5, 2003. A marriage penalty relief is now in place by increasing the standard deduction and expansion of the 15 percent bracket. The maximum child tax credit has been increased from $600 to $1,000 per child for 2003. You should have already or will receive a $400 per child advance payment check from the Internal Revenue Service this summer as an advance payment against future tax credits. Apparently this is not an outright gift. It is receiving money now for the child tax credit that would have reduced your income taxes next year.
Tax law changes for businesses
The special first-year depreciation allowance, the one that was inserted Sept. 11, 2001, has been increased from 30 percent to 50 percent for property purchased after May 5, 2003. The maximum section 179 expensing amount has been increased from what would have been $25,000 to $100,000 for 2003.
Frequently asked questions about the new tax law
Is it true the government is going to give us back $100,000?
No way. Actually, the tax bill makes it possible to expense up front, before regular depreciation kicks in, up to $100,000 of new equipment in the first year, up from $25,000. However, just because something’s possible doesn’t mean you should do it. Suppose you buy a new truck this year. Come April 15, 2005, if you expense all of the truck for your 2003 taxes, you’ll have nothing left to depreciate with your 2004 taxes. Without that nice addition to your business expenses on Schedule C, your income tax can be much higher. On top of that, it could even bump you into a higher tax bracket.
Furthermore, there is the matter of selling the equipment. The faster you depreciate the equipment, the less it’s worth — in the eyes of the Internal Revenue Service — when you trade or sell it. If you sell a 3-year-old truck you paid $50,000 for, and it has been fully depreciated, that’s $50,000 in gains you’ll pay taxes on. What a lot of truckers don’t understand is what you owe on the equipment has nothing to do with determining gain or loss when reporting a sale on your income tax return. Most single-truck owner-operators won’t find it prudent to take full advantage of the accelerated depreciation unless they’re in an unusual tax predicament.
When will the tax cut take effect?
Starting July 25, 2003, the IRS mailed 25 million checks to qualifying taxpayers who claimed the child tax credit in 2002. Also starting in July, withholding tables reduced the amount of federal tax withheld from each paycheck, therefore increasing the size of the paycheck.
I have just divorced.Can I cash the check without the endorsement of my ex?
No. If two names are on the check, both must sign.
I have heard you can write off the cost of a new SUV under the bill. Is that true?
That is true. To the outrage of the environmentalists and non-business owners, the law allows small-business owners to deduct up to $100,000 for heavy vehicles the year the money is spent. There is a 6,000-pound threshold, and the largest SUVs qualify under that.
My income is very low. Will I get a reduced income tax?
Not everyone will get a reduced income tax. If you report less than $12,000 taxable income as a married filer or less than $6,000 as a single taxpayer, you will continue to be taxed at 10 percent.
Dividend tax savings
Under the new tax law, dividend income is taxed at capital gains rates, either 15 percent or 5 percent. For someone in the 27 percent tax bracket, that is a big savings. However, dividends from real estate investment trusts don’t qualify.
Planning for the future
Unless they are expended, the provisions for the $100,000 expensing rule will expire Dec. 31, 2005, and the 50 percent bonus depreciation will expire Dec. 31, 2004. That encourages small-business owners to speed up planned purchases.
The ability to expense equipment in the year purchased is reduced for companies that spend more than the $400,000 on qualifying property in any given year. By the time a company purchases $500,000 in equipment, it loses the $100,000 section 179 expensing deduction.
This article has been presented by PBS Tax & Bookkeeping Service, a company that has been providing income tax and bookkeeping services to the trucking industry for more than a quarter century. Contributions to this article were made by Shasta May, director of business development for PBS. If you would like further information, please contact us at 1-800-697-5153. Visit our Web site at www.pbstax.com.
“Everyone’s financial situation is different. This article does not give and is not intended to give specific accounting and/or tax advice. Please consult with your own tax or accounting professional.