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Understanding the 2003 Tax Act
On May 28th, 2003, President Bush signed into law the Jobs and Growth Tax Relief Reconciliation Act of 2003, one of the largest tax cuts in recent history. The recently enacted economic stimulus package provides small businesses and professional practices with unprecedented tax incentives to invest in their business and acquire new equipment.
- Businesses can expense more assets
- Businesses can increase and extend bonus first-year depreciation
- Individuals can benefit from income tax rate reductions
- How you can benefit
- The new 2003 tax law: How does it work in practice?
2003 Tax Act highlights
Businesses can expense more assets
Businesses may now elect to expense (that is, deduct immediately rather than depreciate over several years) the first $100,000 worth of qualified property purchased and placed in service in a tax year.
Impact
- Increases the maximum annual qualified property deduction amount from $25,000 to $100,000.
- Eases the investment limitation by allowing a business to place in service up to $400,000 (formerly $200,000) of qualifying property during the tax year without reducing the maximum annual deduction amount.
- Adjusts for inflation the maximum annual deduction and the investment limitations for tax years beginning after 2003.
- Makes off-the-shelf software eligible for expensing.
- Allows taxpayers to revoke expensing elections without IRS consent.
Requirements
- The equipment must be placed in service in a tax year beginning in 2003, 2004 or 2005.
- Generally, the equipment placed in service may be new or used.
- Not available for companies placing over $500,000 of equipment in service in 2003. For businesses that place equipment in excess of $400,000 in service in a year, the $100,000 maximum annual deduction is reduced by the amount of investment in equipment that exceeds $400,000.
- After the 2005 tax year, the expensing election rules return to the way they were prior to the 2003 Tax Act.
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Businesses can increase and extend bonus first-year depreciation
Businesses that acquire new equipment are allowed to deduct 50% of the cost of equipment acquired in the year of acquisition, in addition to the regular depreciation deduction on the basis remaining after deducting the bonus depreciation amount for such equipment. The remaining balance may be depreciated (per standard depreciation rules) over the remaining life of the asset.
In the case of a 5-year asset (assuming a mid-year convention, 20% first-year depreciation), the business would deduct 60% of the equipment cost in the year of acquisition (50% "bonus" plus 20% of the 50% remaining basis per standard depreciation rules).
Impact
- Special first-year bonus depreciation allowance increases from 30% to 50%.
- The bonus depreciation deduction allowed for vehicles is increased to $7,650 (previously $4,600).
- Bonus depreciation and subsequent depreciation are subject to an AMT relief rule.
Requirements
- The equipment must be acquired and placed in service after May 5, 2003, but before January 1, 2005, and a binding contract to acquire the equipment may not have existed prior to May 6, 2003.
- The equipment must be new.
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Individuals can benefit from income tax rate reductions
Accelerates the 2001 Tax Act's scheduled reduction of marginal tax rates for an individual's ordinary income retroactive to January 1, 2003, and continuing through December 31, 2010.
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- Reduced tax on capital gains. For sales and exchanges after May 5, 2003, and before January 1, 2009, gains on most capital assets held longer than one year will be taxed at the maximum rate of 15% (instead of 20%).
- Reduced tax on corporate dividends. Qualified dividends received by an individual from a domestic corporation (and certain "qualified foreign corporations") are also taxed at the maximum rate of 15% (instead of 35%) for tax years between 2003 and January 1, 2009.
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How you can benefit
Reevaluate your financial plans
Given the changes brought about by the 2003 Tax Act:
- Businesses may want to acquire new equipment or replace old equipment.
- Individuals in the upper tax bracket may wish to reassess their financial situation from investment and tax-related perspectives.
Bank of America can help
Given the expanded options resulting from the 2003 Tax Act, Bank of America's Small Business Client Managers can assist businesses and their owners in developing custom strategies for achieving their goals. Rely on Bank of America to:
- Assist you in considering the timing and financing of new plants and equipment to maximize new accelerated depreciation permitted by the new tax law.
- Analyze business debt capacity and liquidity needs to help you identify viable options for funding objectives, such as increasing personal liquidity or diversifying away from a particular holding.
- Assist you and your tax advisors in developing strategies to reduce estimated tax payments.
Talk to your client manager
Many of the benefits of this "front-loaded" tax cut can be realized immediately or in the near future but have the potential to disappear as the new changes revert to the previously existing tax law - in some cases, as soon as 2005.
To take advantage of changes in the new tax law, contact us.
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The new 2003 tax law: How does it work in practice?
| Example 1: Section 179 Expensing |
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| Example 2: Bonus Depreciation |
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| Bank of America, N.A. is not a tax advisor. Please consult your personal tax advisor before making tax-related decisions. |
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