Business Tax Changes for 2005

In October of 2004, President Bush signed what many consider to be the biggest business tax reform package since 1986. The American Jobs Creation Act of 2004 introduces nearly $145 billion in tax incentives to help businesses create new jobs and compete better globally.

The law is far-reaching and is particularly beneficial to US manufacturing. It includes the repeal of an internationally disputed export tax deduction which brought to an end months of European Union trade sanctions. The old law only benefited US manufacturers that exported their goods. In place of this export tax break is a host of new tax deductions. Included is an important change allowing US manufacturers that do not export their goods to benefit from the new tax incentives.

New Manufacturing Deduction

The law is a big win for US “manufacturers.” It created a new manufacturing deduction equal to 3 percent of qualifying income for tax years beginning in 2005 and 2006, 6 percent of qualifying income for tax years beginning in 2007, 2008, and 2009 and for tax years beginning after 2009, the deduction is 9 percent.

The deduction is limited to the lesser of:

1. A company's qualified manufacturing net income
2. A company's taxable income for the tax year.
3. The deduction is further limited to 50 percent of wages paid during the calendar year ending in the company's tax year.

The deduction is available to C corporations, S corporations, partnerships, sole proprietorships, cooperatives, estates and trusts. It effectively reduces the maximum corporate income tax rate for US manufacturing three percentage points, from 35 to 32 percent.

Definition of “Manufacturing” Is Expanded

The law expands the definition of “manufacturers” that are able to take advantage of the new tax deductions to include:

• Traditional Manufacturing
• Construction (on projects in the US )
• Engineering and Architecture (performed in the US on projects that will be in the US )
• Processing of Agricultural Products
• Energy Production
• Computer Software Development
  

Dave Burger is a Certified Public Accountant and the Member in charge of the Manufacturing Group at Kennedy and Coe, LLC. Dave has a broad background in consulting, accounting and tax with specialization in the area of manufacturing including: Income Tax Credits, Costing Systems, Gain Sharing and Inventory Management.

Dave is a native of Wichita and a graduate of Wichita State University with a Bachelor of Business Administration in Accounting and Bachelor of Science in Chemistry.

Activities Excluded

Activities that do not qualify for the new manufacturing deduction include:

• The sale of food or beverages prepared by you at a retail establishment
• The transmission or distribution of electricity, natural gas, or water
• Property that is leased, licensed or rented for use by a related person

Other Tax Changes

The law made over 75 major changes to the tax code. Other items included in the changes are:

• The law e xtends enhanced Section 179 expensing for two more years, allowing small businesses to immediately expense up to $100,000 of new equipment purchases through 2007.
• Simplification of the qualifications to be taxed as a Subchapter S corporation
• Limitations on charitable contributions for vehicle donations – if a vehicle is donated to a charity and it is in turn sold by the charity, the donor's charitable deduction is limited to the sales price the charity receives
• Allows individuals that itemize their deductions the option to deduct state sales tax instead of state and local income taxes
• Increased penalties for promoters of abusive tax shelters
• Restricts the use of company owned aircraft by executives

Hummer Tax Loophole Is Closed

With the American Jobs Creation Act, Congress reduced what some have called “the Hummer Tax Loophole.” Small business owners, who once received a $100,000 write-off for purchasing “heavy-duty” vehicles weighing at least 6,001 pounds when loaded, may now only write off $25,000. The Hummer Tax Loophole officially closed as of October 22, 2004 .

Winners and Losers

As is the situation on most tax law changes, there are winners and losers. After all, the $145 billion in tax incentives is offset by $145 billion in revenue raisers. Consult your tax advisors or do the research to take advantage of the new tax incentives – while avoiding the new revenue raisers.