Taxes are Changing but Still Challenging

o paraphrase Bob Dylan, and as millions of Americans are finding out first-hand, the taxes, they are a-changing.
President George W. Bush is giving gifts to almost everybody who pays taxes this year. The gifts total $350 billion, in fact, the third largest tax cut in American history. And, whether you agree with this tax policy or not, it’s not a bad idea to know what you’re going to get. Unlike the presents that come in the form of flowers or chocolate on Valentine’s Day, these gifts require slogging through some paperwork, especially if you’re going to do your own taxes.

This major overhaul in the tax code is known as the Jobs and Growth Tax Relief and Reconciliation Act of 2003. “They love giving these codes long names,” says Paul Cioffari, a partner at Filomeno & Company P.C. Partners, a certified public accounting firm based in West Hartford, Conn. Cioffari says that this bill includes the most significant tax changes since 1996, when there was a broad tax rate reduction with business incentives. “Gradually, over the years, the rates crept up again,” he says.

Naturally we all have the same question about the 2003 tax incentives: What’s in it for me?

Because so many of the tax modifications are for the individuals’ tax returns, if your business is tied into your personal 1099s or you have an S-Corporation, you may get a better tax break than if you are a major conglomerate. If you’re the owner of a multi-million dollar art gallery, corporate rates haven’t changed, but there are two big changes that will likely help everybody in some way.

Lower Rates For Many Taxpayers

The top four Federal tax brackets on ordinary income have decreased and child tax credits have gone up from $600 to $1,000. As a result, the general consensus among tax experts and financial planners seems to be that taxpayers’ refund checks will increase 38 percent over 2002. Petz Enterprises Inc., which produces the tax preparation software called TaxBrain, predicts that 10 million Americans will receive $24 billion in refunds in early 2004.

Even if you and your employees aren’t directly affected, this means more money in your customers’ pockets — and theoretically, more money to spend on your work. You should probably consider extra marketing to your customers at tax time, even though Cioffari says that the wealthy tend not to pump their refunds into the consumer sector. “But middle-income families who aren’t used to having a windfall of income,” says Cioffari, “they might.”

If nothing else, says Cioffari, “the income from [sole proprietorships or S-Corporations] adds to your personal wealth, and those taxes are being lowered.” So, if you’re a smaller operation and your personal wealth is directly connected to your company’s, both you and your business should have a little extra money in the form of a refund — or you may end up owing less.

Accelerated Depreciation

Depreciation is an area where every business can benefit. Formerly, if you purchased some major equipment, like a computer for your office or a delivery van for your business, you couldn’t deduct it as a one-time business expense. You had to depreciate it over a five-year period.

“ The advantage of expensing an item in one year versus depreciating it is basically the time value of money,” says Cioffari. “[You receive] the tax savings today versus waiting five years for it.” Instead of spreading out your deduction, you can take the full 100 percent in the year you make the purchase.

One caveat, though. These are for non-real estate purchases. And it’s going to help your bottom-line much more if you take the extra money you’ve saved and invest it back into your
business.

The new tax rule also quadrupled the base cost of your eligible purchases from $25,000 to $100,000. If you made a single large purchase no greater than $100,000 in 2003, instead of depreciating it over several years you can do it in just one, which ultimately means that you’re getting a nice fat deduction instead of a depreciation. If business is booming, the tax law has been reconfigured so that you could buy several expensive pieces of equipment for your business, up to $400,000 in all, and you can deduct $100,000 of those expenses this year, rather than depreciating them over several years. If you’ve invested a lot in your business — over $400,000 — even this depreciating is new and improved. You can take advantage of a bonus depreciation at 50 percent over two years, instead of 30 percent over three years.

If you’re regretting that you waited to buy that new overhead lighting or security system, you still can get it this year or in 2005. These depreciation gifts will be in effect until Dec. 31, 2005.

Another helpful depreciation rule that’s been amended is the “[software] that you might pick up at Staples,” says Cioffari. These products used to be depreciable over 36 months. Now you can depreciate the entire cost in the year that you buy it.

Confusing? You bet it is, which is why it’s hard to argue with an obviously biased Cioffari, when he suggests bringing in professional help when tax season arrives. “It’s hard to do your own taxes, and it’s just getting harder,” he says. “I know that by the number of relatives coming to me for help.”