Please keep in mind that this covers only the highlights of the most important changes in the new law. Please consult your tax advisor for more details on how you may be affected, and whether immediate action is needed to take advantage of the tax breaks in this important tax legislation.
New Law Changes Affecting Businesses
New deduction for U.S. production activities. The Jobs Act creates a new tax deduction for domestic production activities. The deduction is a percentage of the net income from these activities-3% in 2005-2006, 6% for 2007-2009, 9% after 2009-but it is subject to several limitations.
The new deduction is allowed for qualified production activities income, which is the domestic production gross receipts of a business net of related expenses. "Domestic production gross receipts" includes receipts from any lease, rental, license, sale, exchange, etc., of qualifying production property (i.e., tangible personal property, any computer software, and certain sound recordings) that was manufactured, produced, grown, or extracted in whole or in significant part by the business within the U.S. Also included are receipts from construction in the U.S., engineering and architectural services performed in the U.S. for construction projects in the U.S., and the domestic production of certain films.
"Domestic production gross receipts" don't include gross receipts from selling food or beverages at a retail establishment.
Complex allocation rules will apply if only part of a business's gross receipts are domestic production gross receipts. The deduction is available to regular (C) corporations, passthrough entities such as S corporations and partnerships, and to sole proprietorships, estates, and trusts.
Robust expensing tax breaks extended for two more years. A business or practice that buys machinery and equipment generally deducts its cost over a number of years via depreciation. The expensing election permits a business or practice to expense (that is, deduct immediately rather than depreciate over several years) a certain amount of the cost of tangible depreciable personal property purchased and placed in service during the year. The maximum annual expensing amount is $100,000 (adjusted for inflation), and the maximum annual expensing amount begins to phase out dollar-for-dollar when the business or practice places in service during the tax year expensing-eligible property in excess of $400,000 (adjusted for inflation). Before the 2004 Jobs Act, these rules only applied for tax years beginning in 2003 through 2005. After 2005, the maximum expensing amount was scheduled to drop to $25,000, and the expensing phaseout figure was set to drop from $400,000 to $200,000. Under the 2004 Jobs Act, the $100,000/$400,000 amounts (adjusted for inflation) will stay in place through tax years beginning before 2008. The 2004 Jobs Act also extends through 2007 several other expensing breaks (allowing most software to be expensed, and allowing taxpayers to revoke expensing elections on amended returns without the IRS's consent).
New 15-year writeoff for qualifying leasehold improvements and qualifying restaurant property. Effective for property placed in service after Oct. 22, 2004, and before Jan. 1, 2006, the Jobs Act OKs 15-year straight line depreciation for qualifying leasehold improvements and qualified restaurant property. In general terms, qualifying leasehold improvements are interior improvements made under a lease to commercial property, (such as an office building or warehouse), and placed in service more than three years after the building was first placed in service. Certain structural improvements don't qualify, and neither do expansions. Also, improvements made by a building owner usually won't produce a fast writeoff for a subsequent owner. Qualified restaurant property is any improvement to a building if the improvement is placed in service more than three years after the date the building was first placed in service and more than 50% of the building's square footage is devoted to the preparation of, and seating for, on-premises consumption of prepared meals. In general, qualifying leasehold improvements and qualifying restaurant property were written off over 39 years under prior law.
Liberalized S corporation rules. Effective for tax years beginning after 2004, the Jobs Act makes it easier for businesses to qualify for S corporation status. Among the more important liberalizations are an increase in the maximum number of shareholders from 75 to 100 and allowing family members to be counted as one shareholder for purposes of determining the maximum number of shareholders.
Limited expensing writeoff for heavy SUVs. Heavy SUVs-those with a gross vehicle weight rating (GVWR) of more than 6,000 pounds-are not subject to the "luxury auto" depreciation dollar caps and lease income inclusion amount rules. Under the rules that applied before the 2004 Jobs Act, this meant that the entire cost of a heavy SUV used 100% for business could be written off under the expensing rules. Effective for vehicles placed in service after Oct. 22, 2004, only $25,000 of the cost of a heavy SUV may be expensed.