Significant Tax Law/Form Changes for 2004 - US – Individual

• The following is a summary of the significant tax law and forms changes from 2004 IRS instructions and publications.
  
  * Health Savings Account (HSA) Deduction - a taxpayer may be able to take a deduction if contributions (other than employer contributions) were made to an HSA for 2004. Note that Form 8889 is not yet available from the IRS.
  
  In the program, enter HSA contributions, deductions, and distributions in Screen 32, HSA/MSA/LTC Contracts.
  
  * Tuition and Fees Deduction - a taxpayer may be able to deduct up to $4,000 if the taxpayer's adjusted gross income (AGI) is not more than $65,000 ($130,000 if married filing jointly), or deduct up to $2,000 if AGI is higher than that limit but not more than $80,000 ($160,000 if married filing jointly). See Form 1040 instructions for line 27 on page 29.
  
  * Sales Tax Deduction - a taxpayer can elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A. Generally, a taxpayer can use either actual expenses or the Optional State Sales Tax Tables to figure state and local general sales tax deduction.
  
  In the program, new fields have been added to Screen 25, Itemized Deductions, for sales and use taxes paid. The program automatically optimizes between actual sales taxes paid and the amount per the tables. In addition, the program automatically optimizes between the sales tax and income tax.
  
  * Standard Mileage Rates - the 2004 rate for business use of a vehicle is 37.5 cents a mile and it can now be applied to up to four vehicles used simultaneously in a business. The 2004 rate for use of a vehicle to get medical care or to move is 14 cents a mile.
  
  * Election to Deduct Limited Amount of Start-Up Costs - a taxpayer can elect to deduct up to $5,000 of start-up costs paid or incurred after October 22, 2004. Any remainder can be amortized over 15 years.
  
  In the program, enter the start-up costs to be deducted in "Basis reduction (amortizable costs expensed, ITC, etc.)" (Screen 22, code 27).
  
  * Like-Kind Exchanges - New regulations were released that reinforce and clarify Notice 2000-4 treatment of like-kind exchanges. To elect out of the regulations, a statement must generally be attached to a return. If trading a vehicle used for employee business use and not electing out of the regulations, the IRS now requests a Form 4562 for the traded vehicle in lieu of completing Form 2106, Part II, Section D. However, if electing out of the regulations, completing Form 2106, Part II, Section D instead of Form 4562 serves as the election and it is not necessary to attach a statement.
  
  In the program, press F1 on input field "Elect to not apply like-kind exchange regulations" (Screen 22, code 278) for more information.
  
  * Maximum Section 179 Increased - generally, the maximum Section 179 deduction is $102,000. It is $137,000 for qualified enterprise zone, renewal community, and New York Liberty Zone property. For certain sport utility and other vehicles placed in service after October 22, 2004, the maximum is $25,000.
  
  In the program, make an entry in "Sport utility vehicle over 6,000 pounds" (Screen 22, code 309) to designate an SUV as subject to the $25,000 maximum Section 179 deduction.
  
  * Qualified Leasehold Improvement Property - such property placed in service after October 22, 2004, is now treated as 15-year property under MACRS.
  
  * Qualified Tuition Program Distributions - a taxpayer may be able to exclude distributions from a private, not just state, qualified tuition program if the distributions are not greater than qualified higher education expense. See IRS Pub. 970.
  
  * IRA Deduction - a taxpayer covered by a retirement plan may be able to take an IRA deduction if modified AGI is less than $55,000 ($75,000 if married filing jointly or qualifying widow(er)). See the 1040 instructions for line 25 that begin on page 26.
  
  * Certain Business Expenses of Reservists, Performing Artists, and Fee-Basis Government Officials - these expenses are now reported on Form 1040, line 24.
  
  * Earned Income Credit (EIC) - if a taxpayer was a member of the U.S. Armed Forces who served in a combat zone, he/she may be able to include nontaxable combat pay in earned income when figuring the EIC. See the 1040 instructions for lines 65a and 65b that begin on page 41.
  
  In the program, enter nontaxable combat pay from Form W-2, box 14 in Screen 10 (Wages).
  
  * Additional Child Tax Credit - the credit limit based on earned income is increased to 15% of the taxpayer's earned income that exceeds $10,750. If the taxpayer was a member of the U.S. Armed Forces who served in a combat zone, his/her nontaxable combat pay counts as earned income when figuring this credit limit. See Form 8812 for details.
  
  * Income Averaging for Farmers and Fishermen - fishermen can elect to use income averaging on Schedule J to reduce their tax. Also, the benefit of income averaging is extended to farmers and fishermen who owe the alternative minimum tax. See the Instructions for Schedule J.
  
  In the program, the net income of any Schedule C with a principal business code of 114110 = Fishing is automatically included in Schedule J computations. Any capital gains tied to the Schedule C would be included as well.
  
  * Unlawful Discrimination Claims - a taxpayer may be able to take a deduction on Form 1040, line 35 for attorney fees and court costs paid after October 22, 2004, for actions settled or decided after that date involving a claim of unlawful discrimination. See IRS Pub. 525.
  
  In the program, enter the unlawful discrimination claims fees in the Other Adjustments input fields in Screen 24, Adjustments to Income.
  
  * Excise Tax on Insider Stock Compensation from an Expatriated Corporation - a taxpayer may owe a 15% excise tax on the value of nonstatutory stock options and certain other stock-based compensation from an expatriated corporation. See the 1040 instructions for line 62 on page 40.
  
  In the program, enter the excise tax in the Other Taxes input field in Screen 45, Other Taxes.
  
  * Children under Age 14 with Investment Income - for children under age 14, investment income over $1,600 ($1,500 in prior years) is taxed at the parent's rate if the parent's rate is higher than the child's.
  
  * Forms 1040A and 1040EZ Income Limit - to qualify for filing Form 1040A and Form 1040EZ, a taxpayer's taxable income must be less than $100,000 ($50,000 in prior years).
  
  * Schedule C-EZ Expense Limit - to qualify for filing Schedule C-EZ, a taxpayer's maximum amount of business expenses cannot exceed $5,000 ($2,500 in prior years).
  
  * Partner and Shareholder K-1s - The form has been completely redesigned by the IRS. It is now one page and codes are used to identify certain income and expense amounts.
  
  * Tax Computation Worksheet - for taxpayers with taxable income of $100,000 or more, the new Tax Computation Worksheet should be used instead of the Tax Rate Schedules to figure tax. The Tax Computation Worksheet is on page 72 of the 1040 instructions.
  
  * Alternative Preparer Signature Methods - the IRS now allows income tax return preparers to sign original returns, amended returns, or requests for filing extensions by rubber stamp, mechanical device, or computer software program.
  
  See separate Support Bulletin "Alternative Methods of Signing Returns by Preparers" for additional information.
  
  * Mailing Return - a return may have to be filed with a different address due to filing location changes that were made for taxpayers in certain states. (Cpopyright BNA)

Significant Tax Law/Form Changes for 2004 - US – Busnesses

Update on two major tax laws that have just passed Congress: the American Jobs Creation Act of 2004 and the Working Families Tax Relief Act of 2004. Both have important ramifications to virtually every business. Of the two, the American Jobs Creation Act of 2004 is the more complicated and extensive. In fact, it is considered the most important tax bill for the business community since 1986.

This page will introduce you to some of the major changes that have taken place in connection with the tax law's application to business entities and business operations. Most of the changes present opportunities for your business to save more taxes. Some, however, set traps for the unwary while others are outright attempts to wring a few more tax dollars out of the business community.

New deduction for manufacturers. Even if you don't think you are a manufacturer, this new deduction may be for you. Four years ago, the World Trade Organization declared the FSC/ETI (foreign sales corporation/extraterritorial income) tax regime for exporters an illegal trade subsidy and began to slap high fines on those businesses. In response, Congress has repealed that system (over a four-year period). In its place, it approved a new deduction for manufacturers.

The new deduction for manufacturers, which itself is phased in gradually over six years, surprised many experts. It covers all income from manufacturing in the United States, not only from export businesses. It represents up to a 3 percentage point drop in a business's effective tax rate. What's more, "manufacturing" is defined very broadly to include not only traditional manufacturing, but also construction, engineering, energy production, computer software, filmmaking, and the processing of agricultural products. Corporations, individuals, S corporations, partnerships, estates, trusts, and cooperatives can take advantage of the new deduction.

Small business expensing and depreciation. Two years ago, Congress raised the threshold for small business expensing from $25,000 to $100,000. The enhanced treatment was designed as a temporary measure to stimulate the economy, falling back to $25,000 in 2006. The new law extends the higher small business expensing amounts through 2007.

The SUV deduction. Large sports utility vehicles and luxury passenger trucks will no longer be able to be driven through a large tax loophole by business owners. Because the vehicle caps on depreciation do not apply to cars or trucks weighing more than 6,000 pounds, taxpayers could deduct up to the full cost of the SUV immediately as a section 179 deduction. Now the deduction for vehicles weighing not more than 14,000 pounds is capped at $25,000, effective for property placed in service after October 22, 2004. However, that is still a lot more than the cap placed on "regular vehicles," which hovers around the $3,000 level.

Depreciation. Congress approved a 15-year recovery period, using straight-line depreciation, for qualified leasehold improvements to nonresidential real property. The new law also provides a 15-year recovery period and straight-line depreciation for qualified restaurant property.

S corporation reform. The new law dramatically changes the S corporation rules. Under the recent legislation, the permissible number of S corporation shareholders increases from 75 to 100. In addition, Congress also approved treating all members of a family as one S corporation shareholder. If you own a family business, this can represent a significant tax break.

The new law also permits traditional and Roth IRAs to hold shares in a bank that is an S corporation; allows suspended losses or deductions to be transferred in the case of transfers of stock to a spouse incident to divorce; eases the rules for determining potential current beneficiaries of an electing small business trust; relaxes some passive activity loss rules as they relate to qualified subchapter S trusts; gives relief from inadvertent invalid subchapter S subsidiary elections and terminations; and provides for qualified subchapter S subsidiaries to file information returns.

International tax reform. If you do business abroad, you will need to react to the American Jobs Creation Act in many different ways. Congress approved reducing the number of foreign tax credit baskets from nine to two: passive category income and general category income. The new law also delineates some financial services income as general category income and allows taxpayers to make a temporary election about certain creditable foreign taxes. Congress also approved changes to the interest expense allocation rules for the foreign tax credit limitation. An actual list of all the changes in this area literally goes on for pages.

Tax breaks for farmers. Agribusiness as well as traditional farmers make out well under the new tax laws. In addition to qualifying the processing of agricultural products as "manufacturing" eligible for the three-percent corporate tax reduction, the new law adds over 20 agricultural tax breaks and incentives to the Code, including significant provisions affecting weather-forced livestock gain and the alternative minimum tax as applied specifically to the usual ups and downs of farm income from year to year.

Extended business credits and deductions. The Working Families Tax Relief Act of 2004 is not just for families. An entire section of this new law extends over 20 temporary business incentives, which either had expired at the end of 2003 or at the 2004 midpoint. These include the research credit, the welfare-to-work and work opportunity tax credits, environmental remediation expensing, which is extended for expenses paid or incurred after 2003 and before 2006, and the renewable source energy credit.

Revenue Raisers. Not all of the provisions in the new tax laws are favorable. Over $100 billion in "revenue raising" provisions temper the celebration. These provisions also form a long list and need to be monitored. Under the new legislation, tax shelter investors have been asked to pay up with increased penalties; the personal use of company aircraft by the company's executive/owners can no longer be deducted by the business in an amount that is greater than what is considered compensation to the employee; and the size of vehicle donations, whether by a business or an individual, also has been severely restricted, effective starting in 2005. (Copyright CCH)

Want to Check on a Domain Name

Please contact our Web master with questions or comments.

Copyright 1999 Jerry E. Bartram, CPA All rights reserved.

Web designed and authored by Jerry E. Bartram, CPA Last Updated 02/08/08

"IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, I inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any matters addressed herein."