Year-end tax strategies: explore these planning opportunities under the jobs and growth tax relief reconciliation act of 2003.
Many of the key tax relief measures are subject to sunset provisions and thus it behooves business owners to navigate through the new rules and identify the planning opportunities lurking within before their possible expiration. The following summary intends to provide a compass.
Tax bracket reductions -- The pre-2003 Act brackets of 15, 28, 31, 36 and 39.6 have been reduced to 10, 15, 25, 33 and 35 percent, effective Jan. 1, 2003 through 2010. Therefore, new withholding tables have been released by the IRS that allow business persons to reduce their withholding on wages and possibly invest the tax savings into an IRA or other savings vehicle that could result in a tax deduction that did not previously exist.
Dividends -- New preferential rates of 15 percent and 5 percent apply to certain dividends received by U.S. individuals from domestic and foreign corporations. The lower rates may have application to amounts not actually distributed (e.g., accumulated earnings in U.S. corporations and earnings of foreign corporations liquidated into the United States). Further, introducing or increasing corporate debt to assist in the distribution of cash dividends could result in increased interest expense deductions at the corporate level and lower tax costs at the shareholder level.
Capital gains -- New reduced rates of 15 percent and 5 percent apply to gains on the sale of capital assets. Business owners may want to consider whether the sale of built-in gain assets should be accelerated and the sale of built-in loss assets should be delayed.
Depreciation and other expense deductions -- The amount of certain small business property purchases that can be immediately deducted has been increased from $25,000 to $100,000 with the phase-out amount being increased from $200,000 to $400,000. Further, an additional 50 percent bonus first-year depreciation (increased from 30 percent) may also apply to certain property. The utilization of these relief measures may not necessarily be appropriate if the business has net operating losses that are scheduled to expire in the near term.
Because the various choices of entity (C corporations, S corporations, LLCs, partnerships) have their own unique tax treatment in which they are taxed either as a separate entity or at the shareholder level only, the interrelationship of the new tax rules should be reviewed on a broader scale to determine whether more structural changes could result in increased tax benefits. Further, optional methods of moving cash (e.g., through loans, fees or dividends) should also be revisited. Therefore, in addition to plucking the low-hanging fruit provided by the 2003 Tax Act, business owners may want to consider shaking the tree a little as well.
Michael W. Domanski is a partner in the tax department at Honigman Miller Schwartz and Cohn LLP in Detroit, a member of the Detroit Regional Chamber.
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|Author:||Domanski, Michael W.|
|Date:||Nov 1, 2003|
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