Michael J. House, CPA, P.C.

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Newsletter

ISSUE #1

This initial issue of the firm’s online newsletter deals primarily with the many new tax laws that take effect at the beginning of 2005, due mainly to passage of the American Jobs Creation Act of 2004 last October, and a new law passed January 7 in the aftermath of the Tsunami tragedy. 

TSUNAMI DONATIONS: 

For taxpayers who itemize on their individual tax returns, the new law just passed allows a charitable deduction for 2004 for cash contributions made to the tsunami relief effort as long as those contributions are made by January 31, 2005.  In other words, a contribution is allowed to be deducted as if it was made prior to December 31, 2004.

 ALSO NEW FOR 2005

 INDIVIDUALS:

New Deduction for State and Local Sales Taxes. The 2004 Jobs Act (enacted 10/22/04) allows individuals the option of claiming an itemized deduction for either general state and local sales taxes or state income taxes, but not both. This change is intended primarily to put those who live in jurisdictions with low or no personal income taxes on an equal footing with those who are able to deduct state and local income taxes. Under the new rule, you can choose to deduct actual sales tax amounts or instead deduct predetermined amounts from IRS tables (plus actual amounts incurred from purchases of motor vehicles, boats, and certain other items to be specified by the IRS in future guidance).

Unless Congress takes further action to extend the break, the new deduction is currently available only for tax years beginning in 2004 and 2005.  This change is only helpful if you itemize deductions. Unfortunately, you cannot claim the new deduction under the alternative minimum tax (AMT) rules.

Charitable Contributions — Vehicles, Boats, and Planes. Under the new law, deductions for charitable contributions of vehicles, boats, and airplanes for which the claimed value exceeds $500 will depend on how the donated asset is used by the recipient charity. If the charity sells the asset without any significant intervening use or material improvement, the donor’s deduction is generally limited to the amount of gross sales proceeds. (When this rule applies, the actual fair market value of the donated asset is irrelevant.)

In addition, the new law also imposes strict substantiation requirements for contributions of vehicles, boats, and planes when the claimed value exceeds $500. Under these rules, no deduction is allowed unless the donor receives a contemporaneous written acknowledgment from the charity. To be considered contemporaneous, the acknowledgment must be provided to the donor within 30 days of the date of the sale of the asset. A charity can be subject to a penalty of up to $5,000 if it knowingly furnishes a false or fraudulent acknowledgment or if it knowingly fails to furnish an acknowledgment that meets all the new requirements.

These unfavorable changes are effective for contributions made after 2004.  Therefore, if you are considering making a charitable donation of a vehicle, boat, or plane in the near future, you should probably try to do so before year-end. That way, you can deduct the full fair market value of the donated asset, and the recipient charitable organization will only have to comply with the less-strict substantiation requirements imposed under current law.

Sale of Personal Residence Acquired in a Like-kind Exchange. Taxpayers who convert rental property to a principal residence should know that a tax law change may limit their ability to exclude gain on the sale of that residence if they obtained the property through a like-kind exchange. Generally, a taxpayer can exclude up to $250,000 of gain on the sale of a home, provided the individual has owned and used it as a principal residence for two out of the five years before the sale. The exclusion is $500,000 for a married couple if both meet the use test. The American Jobs Creation Act of 2004 does not allow any exclusion if the taxpayer sells the home within five years of acquiring the property through a like-kind exchange. The new law applies to sales after October 22, 2004. 

SMALL BUSINESSES: 

Reduced Section 179 Deduction for SUVs. The new law places a $25,000 limit on the Section 179 deduction for SUVs with gross vehicle weight ratings of 14,000 pounds or less. Previously, SUVs with gross vehicle weight ratings of more than 6,000 pounds could qualify for the full deduction (up to$102,000). This unfavorable change only affects SUVs placed in service after 10/22/04. However, the new rule doesn’t apply to vehicles that meet certain exceptions. For example, many pickups with full-sized beds are unaffected. Vehicles that fall under the tax-law exceptions still qualify for the full Section 179 deduction, as long as they have gross vehicle weight ratings in excess of 6,000 pounds.

Number of S Corporation Shareholders. The new law allows family members to be treated as one shareholder for purposes of determining the number of shareholders of an S corporation. Even better, the new law increases the maximum allowable number of shareholders from the current 75 to 100. These changes are effective for tax years beginning after 2004. 

New Rules for Start-up and Organizational Expenditures. Under current law, taxpayers can amortize business start-up expenditures (expenses incurred before the operation is up and running) over 60 months. They can also amortize corporate and partnership organizational expenditures over the same period. Under the new law, taxpayers can immediately deduct up to $5,000 of start-up costs and up to $5,000 of organizational expenditures in the tax year in which the business begins, and phasing out after $50,000 of costs. Startup and organizational expenditures that are not deductible in the year the business begins must be capitalized and amortized over 15 years on a straight-line basis. This change is effective for expenditures incurred after 10/22/04. 

Accelerated Depreciation.  The $100,000 Section 179 expense election limit and $400,000 phase-out threshold is extended through 2007.  This continued enhanced treatment was originally designated as a temporary measure to stimulate the economy. 

15-year Depreciation for Leasehold Improvements. Under previous law, most leasehold improvement costs for nonresidential real property were required to be depreciated over 39 years. The new law establishes a 15-year depreciation period (using the straight-line method) for qualified nonresidential leasehold improvement property. This favorable new rule applies to qualified leasehold improvements placed in service after the date of enactment and before 2006.

Contact Information:

Michael J. House, CPA, P.C.

5010 E. Shea Blvd.  Suite B-210

Scottsdale, Arizona  85254

Tel:  (480)  905-3715

Fax: (480)  905-3717

Email:  Michael@MJHouseCPA.com