2004 Working Families Tax Relief Act: Business Provisions

The new tax cut package that Congress passed on September 23 contains as many business-related provisions as it does individual, personal tax relief. While the title of the new law is The Working Families Tax Relief Act of 2004, it helps businesses as well as individuals. What began as a tax bill to raise the child tax credit exploded into a much larger bill as lawmakers worried that it might be the last tax cut for 2004. Many tax breaks for businesses had to be extended, key members of Congress argued. The Working Families Tax Relief Act presented Congress with the opportunity to accomplish these business extensions. If it were not for this new law, you and other businesses might have lost out on more than 30 tax breaks.

This letter outlines some major details about the new law, from the business perspective. Of course, your personal income taxes also have been lowered making the combination of personal and business tax breaks a significant benefit.

Extended Tax Relief

The new law extends more than 30 business tax incentives. Here are some of the major extensions:

• The research and development tax credit is extended for amounts paid or incurred after June 30, 2004 and before 2006. Over $4.3 billion in research and development credits are claimed each year by some of America’s biggest companies. They had lobbied for an expansion of the research tax credit, but came away with only an extension.
• The welfare-to-work and work opportunity tax credits are extended for wages paid or incurred for qualified individuals starting work after 2003 and before 2006. Many businesses have been lobbying for extensions of these two credits, which reward employers for hiring economically disadvantaged individuals. The WOTC can reach as high as $2,400 for each employee. The maximum welfare-to-work credit is $8,500 per employee.
• The enhanced deduction for charitable contributions of qualified computers is extended for contributions made in tax years beginning after 2003 and before 2006. Donations generally must be made to libraries and schools.
• The teacher’s classroom expense deduction is extended for 2004 and 2005. This incentive allows professional educators to deduct, above the line, up to $250 of out-of-pocket classroom expenses. The deduction is available to K-12 teachers, instructors, counselors, principals and aides. The deduction had expired at the beginning of this year. The new law extends it for 2004 and 2005. The “average teacher reportedly spends about $450 of his or her own money each year on books and supplies.” Eighty percent report spending $1,000 or more.
• Contributions to Archer Medical Savings Accounts (MSAs) are extended through 2004 and 2005. Archer MSAs have not fulfilled the initial vision of many lawmakers. Participation has lagged and now they have a new competitor: Health savings Accounts (HSAs). MSA balances may be rolled over into HSAs.
• The expensing of environmental remediation costs is extended for expenses paid or incurred after 2003 and before 2006.
• The renewable-source energy credit is extended for facilities placed in service after 2003 and 2006.
• Suspension of the marginal-well new-income limitation is extended for tax years beginning after 2003 and before 2006.
• The credit phase-out for qualified electric and clean fuel vehicles is ignored for property acquired in 2004 and 2005.
• Qualified Zone Academy Bonds receive special treatment through 2005.

Technical Corrections

The new law also devotes an entire section to “technical Corrections.” They impact 15 major issues about interpretations of tax laws that have been enacted over the past 10 years. The majority of these corrections make substantive tax law changes that affect businesses. The most important provisions include:

• Health savings accounts. Amounts distributed from HSAs are not counted in determining the amount of health coverage tax credit an individual is eligible to receive.
• Dividends rate. The new law clarifies that the extraordinary dividend rule applies to trusts and estates as well as individuals. It also explains the 2002-2003 transition rules.
• Stock holding period. The new law permits taxpayers to satisfy the stock holding period requirements when they acquire stock on the day before the ex-dividend date.
• Bonus depreciation. Bonus depreciation property includes property subject to the section 263A capitalization rules by reason of having a long useful life.
• Five-year NOL carryback. Only NOLs arising in tax years ending in 2001 and 2002 qualify for the five-year NOL carryback period.

Other Issues

Some important tax cuts are not in the new law. That doesn’t mean they should be forgotten. Because they are expiring soon, time is running out to take advantage of them. Among the biggest in this category are section 179 expensing and bonus depreciation.

• After 2005, the $100,000 limit on section 179 expensing is scheduled to revert to the pre-2003 $25,000 level. This is a significant benefit that should not be overlooked while it is still on the books.
• Even more pressing, however, is making certain your business maximizes allowable bonus depreciation. That tax break expires at the end of this year. Most experts anticipate that it will not be extended.

I hope that this letter helps to introduce you to the business tax benefits extended and enhanced by the new tax law. Please call if you need any further details on how one or more of these new provisions benefit your business.