Last October, President Bush signed into law a major tax bill entitled the American Jobs Creation Act of 2004 (AJCA). In true Washington, D.C., fashion—and thanks to some pre-election legislative maneuvering—what started out as a bill solely to address a long-simmering trade dispute between the U.S. and the European Union turned into a measure incorporating a host of corporate tax provisions.
“As enacted, AJCA evolved into a broad, omnibus tax bill that includes incentives for business, relief for farmers, benefits for breeders, and other provisions of interest to the horse industry,” explains Washington, D.C., tax attorney Allan Weiner.
Following is an overview of some of the relevant provisions.
Tax Break for Breeders
Income from breeding and selling horses qualifies for a new deduction for income from the sale of property that was manufactured, produced or grown by a taxpayer in whole—or in significant part—in the United States. Beginning this year, a breeder will be entitled to this deduction, which increases through the years until fully implemented in 2010. In 2005 and 2006, breeders can take a 3 percent deduction on their tax return based on the profits from sales of foals they produced. In 2007, 2008 and 2009, the deduction increases to 6 percent; and then goes up to 9 percent in 2010 and thereafter. The deduction is limited to 50 percent of wages paid in the applicable year.
Businesses do not have to be organized as corporations to claim the deduction. Sole proprietorships and pass-through entities such as S corporations could earn the deduction and pass it through to their owners.
With the enhanced section 179 expensing provided for in the Act, small businesses can immediately expense up to $100,000 of new investments through 2007. In general, when a business acquires assets such as machines and equipment, it is permitted to deduct the acquisition cost only gradually, as depreciation. The 179 expensing provisions, however, permit businesses to deduct a certain amount of investment in the year the property is placed in service. This provision is due to expire in 2007.
Leasehold Improvements Better
Generally, leasehold improvements are depreciated separately from the original, improved asset, but over the same recovery period as applicable to the improved asset. This treatment applies even if the recovery period is longer than the term of the lease. For leased buildings, the Act provides a 15-year recovery period for improvements to non-residential structures (non-residential structures must generally be depreciated over 39 years). The provision is temporary, applying to improvements made before 2006.
Alternative Minimum Tax Relief
An added special rule coordinates the benefit of a farmer’s income averaging with the determination of alternative minimum tax (AMT). For AMT purposes, a farmer’s regular tax liability is determined without regard to income averaging. Thus, a farmer receives the full benefit of income averaging, because averaging reduces the regular tax while the AMT (if any) remains unchanged. Previously, because farmer income averaging reduced the regular tax liability, the AMT could increase. Thus, for farmers subject to the AMT, the benefits of farmer income averaging were reduced or eliminated.
Special Rules for Livestock Sold Due to Weather-Related Conditions
The Act extends the applicable period for a taxpayer to replace livestock sold on account of drought, flood or other weather-related conditions from two years to four years after the close of the first taxable year in which any part of the gain on conversion is realized. The extension is only available if the taxpayer establishes that, under the taxpayer’s usual business practices, the sale would not have occurred but for the disaster that resulted in the area being designated as eligible for Federal assistance. In addition, if replacement with livestock is not feasible, reinvestment in other property used for farming purposes is permissible.
Deductions for State and Local Taxes
While the majority of the Act’s provisions are directed at businesses, there are several individual income tax provisions. A major change permits taxpayers who itemize to choose whether to deduct their state and local income taxes or sales taxes. The sales tax break obviously will help residents of states without income taxes, but, in some cases, state income taxes may be low enough to make the sales tax deduction more valuable. Taxpayers will have the option of basing their deduction on their own receipts or on an amount determined under tables issued by the Internal Revenue Service. The provision is applicable for 2004 and 2005.
The IRS mileage rates that taxpayers can use in computing their deductible costs in 2005 for operating an automobile, van, pickup or panel truck for business purposes increased 3 cents, the largest one-year rise ever. The rate, which went into effect January 1, is 40.5 cents a mile for all business miles driven, up from 37.5 cents in 2004. According to the IRS, the increase resulted primarily from the higher prices for vehicles and fuel during 2004.
For further information on these horse-industry-related provisions in the American Jobs Creation Act, contact Allan Weiner of the Washington, D.C., law firm Collier Shannon Scott, PLLC. Mr. Weiner can be reached via e-mail at [email protected].