CONGRESS PASSED THE JOBS
AND GROWTH TAX RELIEF
Reconciliation Act of 2003 to
boost consumer spending and increase
business capital expenditures. The act
accelerates previously passed rate
reductions, lowers long-term capital gains
tax rates, reduces the tax on qualified
dividends and provides increased IRC
section 179 and bonus depreciation
deductions for businesses. |
LONG-TERM CAPITAL GAINS A
TAXPAYER REALIZES after May
5, 2003, and before January 1, 2009,
will be taxed at 15% for most taxpayers.
Certain taxpayers will pay only 5%. A
small business owner contemplating
retirement thus may want to consider
selling his or her business during this
period to take advantage of the lower
THE ACT LOWERS THE TAX
RATE ON QUALIFIED dividends
to 15% for most taxpayers. A planning
tip for closely held corporations
suggests they reconsider their pay
packages to include more dividends in
lieu of salary or bonus. Investors might
change their asset allocations to give
greater weight to dividend-paying
THE NEW LAW INCREASES THE
MAXIMUM ALLOWABLE section 179
expensing deduction to $100,000 on
qualified business property the taxpayer
places in service in 2003, 2004 and
2005. For these years the act expands
the definition of qualified property to
include off-the-shelf computer software.
JGTRRA BOOSTS THE BONUS
DEPRECIATION DEDUCTION to 50%
from 30% on property the taxpayer places
in service after May 6, 2003, and before
January 1, 2005. Taxpayers who plan to
acquire or construct a new building may
want to engage an expert to help them
identify components that qualify for the
|REBECCA CARR, CPA, is an
instructor in accounting at Arkansas State
University at Jonesboro. Her e-mail
firstname.lastname@example.org . TINA QUINN, CPA,
PhD, is associate professor of accountancy
at Arkansas State University. Her e-mail
address is email@example.com
n an attempt to jump-start the
economy by boosting consumer spending and
increasing business capital expenditures, Congress
passed, and President Bush signed into law, the
Jobs and Growth Tax Relief Reconciliation Act of
2003 (JGTRRA). The act is intended to put more
disposable income in the pockets of individual
taxpayers. For small businesses the act provides
incentives to buy technology, machinery and other
equipment and to expand. This article describes
JGTRRA’s major provisions and offers planning tips
CPAs can use when working with their clients to
help them take maximum advantage of the act in the
remaining months of 2003 and in future years.
LOWER RATES AND BEYOND
JGTRRA makes several
changes for individual taxpayers. Most clients
will benefit from the acceleration of the lower
rates Congress passed under the Economic Growth
and Tax Relief Reconciliation Act of 2001
(EGTRRA). But confusion may also reign as a result
of the myriad different dates when those rates
change and when they revert to pre-JGTRRA levels.
In addition to changing the rates on ordinary
income, the 2003 act lowers long-term capital
gains rates, reduces the tax on qualifying
dividends, increases the child tax credit and
provides marriage penalty relief.
Lower capital gains rate.
Under JGTRRA the tax rate on
long-term capital gains for most taxpayers
drops to 15% from 20%. This provision
expires December 31, 2008, making the 15%
rate effective for gains realized after
May 5, 2003, and before January 1, 2009.
For taxpayers in the 10% or 15% tax
brackets, the rate drops to 5% from 10%
for long-term capital gains realized after
May 5, 2003, and through 2007. The rate
then declines to 0% in 2008 and reverts to
10% in 2009. |
It’s important for CPAs
to note the rate reduction does not
apply to all long-term capital gains;
the 25% rate on unrecaptured IRC section
1250 gains and the 28% rate on
collectibles are unaffected. The
provision also repeals the reduced
capital gains rates on assets held more
than five years.
The High Cost of
joint committee on taxation
has “scored” the Jobs and
Growth Tax Relief
Reconciliation Act of 2003
and says it will cost the
U.S. Treasury $330 billion
over the next 10 years.
Committee on Taxation,
Planning tips. Here are
some pointers CPAs can discuss with their clients
to help them minimize capital gains taxes.
With a 20% spread between rates on
ordinary income and capital gains, it becomes
critical for clients to avoid short-term gains,
which are taxed at the client’s marginal rate.
CPAs should encourage clients to hold assets for
more than one year whenever possible before
It may be advantageous for some
taxpayers to transfer appreciated property to
children (over age 13—to avoid the kiddie-tax
pitfalls). Any gain on the sale of the transferred
property would be taxed at the lower 5% rate. For
sales in 2008, the entire gain could be tax-free.
This would be an excellent way to provide funds
for future college costs. When recommending
transfers, CPAs should keep college financial aid
limits in mind to ensure the transaction doesn’t
harm the student’s aid eligibility.
For small business owners considering
retirement, the changes in capital gains rates may
signal it is time to scale back or sell their
businesses to take advantage of the lower rates.
When helping clients structure
installment sales, remember that capital gains
rates revert to old levels in 2009. Clients can
save substantial tax dollars by receiving all
installment payments by the end of 2008.
With capital gains rates at historic
lows, this is the perfect time for CPAs to
recommend clients sell low-basis stock they may
have acquired through gift, inheritance or the
sale of a business.
Reduced rate on dividends. T
he act cuts the tax rate on
qualified dividends corporations pay to
individuals to the level of the new capital gains
rates, generally 15%. For taxpayers in the 10% or
15% tax brackets, dividends will be taxed at 5%
through 2007 and drop to 0% in 2008. The new rates
are retroactive to January 1, 2003, and will
expire on December 31, 2008, when they revert to
ordinary income tax rates.
dividends include those from domestic corporations
and qualified foreign corporations. A qualified
foreign corporation is one incorporated in a
possession of the United States or eligible for
the benefits of a U.S. tax treaty. The law treats
nonqualified corporations as qualified if their
stock is readily tradable on an established U.S.
excludes certain dividends from the definition of
qualified dividend income. The exclusion applies
Any dividend from a corporation that
is tax-exempt under IRC section 501 or section 521
during the year of distribution or the prior year.
Any amount allowed as a deduction
under IRC section 591 (deduction for dividends
paid by mutual savings banks).
Any dividend described in IRC section
Dividends that fail to meet the
revised holding period of 60 days instead of 45
days under IRC section 246(c)(1).
The extent to which the taxpayer is
obligated to make payments under section 246(c).
Taxpayers cannot consider qualified
dividends “investment income” for purposes of
computing the allowable investment interest
deduction unless they elect to have the dividends
taxed at ordinary income tax rates. Congress did
not want to permit taxpayers to “double-dip” by
taxing dividends at the lower rate while also
reducing the taxpayer’s ordinary income by the
investment interest deduction.
Planning tips. There are
several ways CPAs can help taxpayers take maximum
advantage of this provision.
Closely held corporations may want to
reconsider their pay packages to include more
dividends in lieu of salary or bonus. The lower
rate on dividends will allow owners to withdraw
more profits at lower tax rates. However, CPAs
should keep in mind the “reasonable compensation”
standard applies to pay that is unreasonably low
as well as unreasonably high.
Some clients should consider changing
their asset allocation strategy. Income stocks now
may be more attractive than some growth stocks.
Although the same tax rate applies to both
dividends and long-term capital gains, the time
value of money makes current dividend income more
attractive than future gains. However, asset
allocation should be driven primarily by the
client’s investment goals and risk tolerance, not
by tax planning alone.
While JGTRRA’s dividend changes may
give clients an incentive to reallocate their
investments, perhaps from growth to income stocks,
the associated transaction costs of liquidating
securities may outweigh the tax benefits of lower
rates on dividends. However, CPAs may want to
suggest clients allocate future investment capital
based on the new rules.
Taxpayers who own convertible bonds
might consider converting them into common stock
if the shares pay a dividend.
For some taxpayers dividend-paying
stocks now may be a more attractive investment
than municipal bonds. CPAs will need to calculate
the aftertax returns on both to see which makes
Although the 15% rate is attractive,
certain taxpayers may want to elect to treat the
dividends as ordinary income if they have enough
investment interest to offset them.
Taxpayers with fixed-income
portfolios may want to weight the portfolio more
toward securities that pay qualified dividends
rather than interest due to the lower tax rate.
Rate changes. JGTRRA
reduces individual income tax rates retroactively
to January 1, 2003. The act also broadens the 10%
bracket to $7,000 for single taxpayers and $14,000
for married taxpayers filing joint returns and
reduces the 27%, 30%, 35% and 38.6% brackets to
25%, 28%, 33% and 35%, respectively. This
accelerates the rate reductions Congress passed
under the 2001 act. Since JGTRRA did not change
EGTRRA’s sunset provisions, after 2010 tax rates
will return to pre-EGTRRA levels.
Planning tip. CPAs and
their clients now may find pass-through entities,
such as S corporations, more attractive. At most
levels business income would be taxed at a lower
rate. In addition S corporations avoid the double
taxation that characterizes C corporations.
Child tax credit. The act
increases the credit to $1,000 from $600.
Qualified taxpayers already should have received
checks for the additional amount. This advance
payment will reduce the credit available when
clients file their 2003 returns. In 2005, the
credit will fall to the EGTRRA-scheduled amount of
$700 and gradually rise until it reaches $1,000
again in 2010.
Planning tip. CPAs should
warn clients that the $1,000 credit applies only
in 2003 and 2004, reverting to the EGTRRA schedule
Marriage penalty relief.
The 2003 act accelerates the
marriage penalty relief provisions in EGTRRA,
changing the standard deduction for married
taxpayers filing a joint return for 2003 and 2004
to twice that for single taxpayers. The deduction
returns to the EGTTRA phase-in schedule in 2005
when it drops to 174% of the single taxpayer
deduction. The act expands the 10% bracket to
$14,000 and the 15% tax bracket to twice that of
single taxpayers. This, too, is only temporary
relief. The 10% bracket reverts to $12,000 for
married taxpayers in 2005 and the 15% bracket
falls to 180% of the single taxpayer amount.
Unfortunately JGTRRA does not give married
couples complete parity with single taxpayers. The
phaseouts on itemized deductions and Roth IRA
limitations still are well below those available
for two single taxpayers.
Planning tips. Here are
some recommendations CPAs should discuss with
The increase in the standard
deduction may make itemizing deductions less
attractive. Wherever possible, taxpayers should
try to defer large deductions (such as charitable
contributions) until 2005 or later and take the
increased standard deduction in 2003 and 2004.
Some taxpayers may want to change
their estimated tax payments or withholding status
as a result of the reduced marriage penalty to put
more money in their pockets right away.
Alternative minimum tax.
The act raises the exemption for
single taxpayers to $40,250 and for married
taxpayers to $58,000, but only for tax years
beginning in 2003 and 2004. Serious AMT reform
still is needed in the future.
Planning tip. Since any
tax law provision that reduces the regular tax has
the potential to subject a client to AMT, CPAs
will have to plan carefully to make sure more
clients don’t fall into the AMT trap. For some
taxpayers it may make sense to structure
transactions with potential AMT consequences in
2003 or 2004 to take advantage of the higher
several provisions for small businesses. Their
intent is to encourage capital investment in
technology, machinery and other equipment
businesses need to expand. Many small business
owners have been waiting for the economy to
improve before expanding. Now they have an
incentive to grow due to the tax savings, which
can help pay for the expansion. Although this new
law targets small businesses, nothing in the act
precludes larger entities from taking advantage of
the changes within the spending limits.
JGTRRA provides for increased IRC section 179
and bonus depreciation expense. Both are in
addition to the regular depreciation expense
(allowing for “triple-dipping”).
Section 179. This change
allows taxpayers to expense part or all of the
cost of qualifying property they place in service
during the tax year. Qualified property is new or
used depreciable tangible personal property a
taxpayer purchases to use in the active conduct of
a trade or business. This includes, for example,
equipment or machinery such as the drill press or
table saw a furniture maker might use.
section 179 deduction is limited to the maximum
amount allowed by law. There also are spending and
net income limits. Pre-JGTRRA rules allowed
taxpayers to expense a maximum of $25,000 under
section 179 with a $200,000 spending limit. A
taxpayer exceeding that restriction would lose the
deduction dollar for dollar and, when spending
reached $225,000, would lose the entire deduction.
Any section 179 deduction could not exceed the
taxpayer’s taxable income from any active trade or
business computed without regard to the section
179 deduction. This means section 179 expenses
could not create or increase a net operating loss.
However, taxpayers could carry over any unused
expense to future tax years where it again would
be subject to the same restrictions. CPAs should
remember that any section 179 carryover can result
only from the net income limit. The law includes
no carryover provision for deductions taxpayers
lose due to the spending limit.
law increases the maximum allowable deduction to
$100,000 and the spending limit to $400,000. Thus
a taxpayer does not lose the entire deduction
until spending reaches $500,000. These figures are
indexed for inflation beginning in 2004. The act
expands the definition of qualified property to
include off-the-shelf computer software. Although
such software is not considered qualified
property, JGTRRA allows expensing under section
179 if the taxpayer places it in service in 2003,
2004 or 2005. The net income limitation remains
the same. This provision is scheduled to expire
after December 31, 2005.
Planning tips. If a
business acquires several assets, CPAs should
separate them based on their recovery period,
whether they are new or used and their date of
purchase. Here are some other suggestions.
Under section 179 taxpayers can
cherry-pick which assets to expense. They should
expense property with the longest useful life in
order to recover the asset’s cost faster.
The bonus depreciation provision does
not apply to used property, so taxpayers should
expense any such property they bought during the
year under section 179.
Property taxpayers acquired before
May 6, 2003, does not qualify for the 50% bonus;
CPAs should recommend clients expense such
property under section 179.n The $100,000 limit is
a maximum; taxpayers may expense a lesser amount.
Taxpayers shouldn’t exceed the
spending restrictions. If necessary, they should
lease property or postpone purchases. Remember,
although section 179 allows a carryover due to low
taxable income, any such carryover will still
decrease the asset’s depreciable basis, thereby
cutting allowable bonus depreciation.
Bonus depreciation. JGTRRA
increases the bonus depreciation deduction to 50%
from 30% for qualified property placed in service
after May 5, 2003, and before January 1, 2005.
Property does not qualify if there was a binding
contract for acquisition before May 6, 2003.
However, such property and other assets the
taxpayer acquired before May 6, 2003, still
qualify for the 30% bonus depreciation. The new
law extends the 30% bonus depreciation to January
The definition of qualified
property has not changed. In general, it covers
new tangible property with a “class” life of 20
years or less, and qualified leasehold
improvements such as office partitions or carpet.
Taxpayers may take the 50% bonus depreciation,
elect the 30% bonus or elect out of any bonus.
Unlike the section 179 provision, there are no
spending or income limitations. Therefore,
taxpayers can use the bonus depreciation to create
or increase a net operating loss.
Planning tips. CPAs can
make several recommendations to enable business
taxpayers to take full advantage of the
Since the bonus
depreciation can create a loss, taxpayers must
consider whether this is desirable. A taxpayer
with sufficient taxable income in the prior two
taxable years should carry back the loss to
produce a refund. Bear in mind the new law did not
extend a provision that allowed for a five-year
carryback. CPAs should help clients consider the
time value of the money as well as predicted
future marginal tax rates before they elect to
carry over a loss.
Taxpayers who plan to
acquire or construct a new building may want to
engage a cost classification expert to help them
identify building components that qualify for the
Increased limit on passenger
automobiles. The act also raised
the bonus depreciation deduction for passenger
automobiles to $7,650 from $4,600. This is in
addition to the regular limit of $3,060, raising
the overall limit for depreciation and section 179
expense for passenger automobiles to $10,710. If
the taxpayer elects out of the bonus depreciation,
the limit remains at $3,060.
CPAs can make these suggestions to
It’s still not advisable to
take section 179 expense on new
passenger automobiles since the law only
increased the allowable bonus
depreciation. The amount of section 179
expense and regular depreciation
taxpayers are allowed still is only
The increase in allowable
depreciation coupled with manufacturer
incentives makes replacement of business
automobiles a timely decision.
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OTHER PLANNING POINTERS
These new provisions
provide a wealth of opportunities for businesses.
Tax planning should involve both the section 179
and the bonus depreciation provisions. Any amount
a taxpayer expenses under section 179 will
decrease the depreciable basis for purposes of
calculating the bonus depreciation. Section 179 is
subject to limitations and applies to both new and
used property, while the bonus depreciation
provisions are not subject to restrictions but
apply only to new property.
taxpayer need not make the decision to elect
section 179 expense or opt out of the bonus
depreciation before filing its tax return, the
effects of these provisions should figure into the
investment decision. Any tax planning a CPA does
must include both to maximize the benefits. There
are several possible combinations of provisions to
choose from. The maximum benefit results from
using both the maximum section 179 and the 50%
bonus depreciation while there is no benefit if
the taxpayer takes only the regular MACRS
depreciation. The exhibit on page 46 provides
three scenarios in which taxpayers at different
income levels can save various amounts by taking
advantage of section 179 and bonus and regular
Good and bad. A sole
proprietor may reap an additional benefit by
lowering his or her taxable income enough to
reduce or eliminate any self-employment tax.
However, since many states will not conform their
section 179 and bonus depreciation rules to the
new federal changes, taxpayers and their CPAs
should proceed with caution. This is particularly
true for multistate businesses.
MORE THAN TAXES
While JGTRRA makes it
more important than ever for CPAs to help
taxpayers evaluate the tax implications of
investment decisions—personal and business—a
purchase, be it stock or accounting software,
should never be based on tax considerations alone.
CPAs should encourage clients to come in for a
consultation before committing to a major personal
investment or business purchase. In the long run,
by avoiding “bad” investments, clients will reap
the rewards with maximum tax savings. And for
CPAs, that’s what it’s all about.
Depreciation and Expensing Rules
different combinations of JGTRRA’s
provisions, the following illustrates the
tax effect of a $400,000 investment in
qualified new equipment with a seven-year
recovery period. Predepreciation income is
projected at $500,000, $300,000 and
$100,000. Different spending levels, of
course, would produce different results at
any income level, as would expensing
different amounts under section 179.
In general the new provisions provide
almost no incentive for a business with
little or no predepreciation net income
unless it carries back the net operating
loss (NOL) to get a refund. If income in
the prior two years is not sufficient to
absorb the loss, the taxpayer should
forgo section 179 and elect out of any
bonus depreciation. However, if the
taxpayer expects future income to be
significantly higher, an NOL carryover
might be advisable.
scenarios—applying different JGTRRA
provisions—are given for each income
income of $500,000 |
||0 ||0 |
||90,000 (30%) ||0
||120,000 (30%) ||0
$500,000 of income, a taxpayer would
save $78,176 ($150,566 minus $72,390) in
federal income taxes in the year of
purchase by taking advantage of both the
maximum section 179 and the 50% bonus
income of $300,000 |
||0 ||0 |
||90,000 (30%) ||0
||120,000 (30%) ||0
taxpayer with income of $300,000 would
save $73,673 ($77,958 minus $4,285) in
federal income tax in the year of
purchase by taking advantage of both the
maximum section 179 and the 50% bonus
income of $100,000 |
||0 ||0 |
||90,000 (30%) ||0
||120,000 (30%) ||0
||0 ||0 ||0
$100,000 of income, the taxpayer would
save only $6,426 in federal income tax
in the year of purchase under any
combination of the section 179 and bonus