Jobs and Growth Tax Relief Reconciliation Act of 2003

Part 2 of a 2-part series

By Craig M. Billmeyer

On May 23, just before the Memorial Day recess, the House and Senate passed sweeping tax cut legislation in response to pressure from the White House. Part I of this series discussed how the third largest tax cut in U.S. history accelerates the 2001 marginal rate cuts, lowers the taxation of dividends and capital gains, and accelerates relief of the Marriage Penalty.

Other provisions, discussed below, allow businesses to increase "bonus" depreciation and expensing for certain new investments. In addition, the new law accelerates the Child Care Credit and increases the Alternative Minimum Tax Exemption.

Although there was no further clarification or relief in the areas of Estate and Gift Tax, the changes as passed appear to afford temporary, but legitimate relief. The timing provisions of the act are quite interesting. Some are applied retroactive to Jan. 1, 2003, while others are implemented for gains recognized on or after May 6, 2003. Some provisions accelerate prior promised reductions, while other provisions return to prior schedules in 2005 or are eliminated altogether after their sunset date of Dec. 31, 2008.

Increase in bonus depreciation

The bonus depreciation deduction is increased from 30 percent to 50 percent for investments acquired and placed in service on or after May 6, 2003, and before Jan.1, 2005. The "bonus" is in addition to normal first-year depreciation. In certain circumstances "bonus depreciation" may be used for the purchase of "luxury" automobiles.

It is important to note that "bonus depreciation" is not available if the acquisition was the subject of a binding, written contract entered into before May 6, 2003. Taxpayers may, however continue to use 30 percent bonus depreciation for property acquired and placed in service before Jan. 1, 2005.

Increase in small business expensing for new investment

In 2003, a qualifying small business may deduct $100,000 in new purchases of eligible property. This change quadruples the amount of Section 179 qualified property purchases that a business can annually expense. The amount of investment qualifying for this immediate deduction begins to phase out for small businesses with investment in excess of $400,000 (increased from $200,000).

The increased limitation applies to property placed in service in fiscal years beginning in 2003, 2004 and 2005. Eligible property includes tangible property (not real estate), equipment, machinery and off-the-shelf computer software.

Accelerated increase in Child Tax Credit

In another temporary change for 2003 and 2004, the act increases the Child Tax Credit from $600 to $1,000, accelerating the phase-in otherwise scheduled between 2005 and 2010. This change will provide approximately 25 million taxpayers with early access to the additional $400 per child credit.

In July, the IRS will begin the process of sending rebate checks ($400 per child) to qualifying individuals on the basis of information on the taxpayer's 2002 tax returns. After 2004, the child tax credit will revert back to the previously scheduled amounts, $700 for 2005-2008, $800 in 2009 and $1,000 in 2010 and thereafter. This credit continues to phase out quickly for joint filers with "modified adjusted gross income" that exceeds $110,000.

Alternative Minimum Tax relief

Congress wanted to be sure that the benefits from the acceleration of the tax reductions were not offset by an unexpected Alternative Minimum Tax (AMT). To ensure that this did not happen, the AMT exemption has been increased by $9,000 for married taxpayers and $4,500 for single taxpayers in 2003 and 2004.

As such, in 2003 and 2004 the exemption will be $58,000 for married taxpayers and surviving spouses, $40,250 for single taxpayers and $29,000 for married taxpayers filing separately. However, starting in 2005, these exemptions drop drastically to $45,000 for married taxpayers and surviving spouses, $33,750 for single taxpayers and $22,500 for married taxpayers filing separately.

Since many of the benefits are retroactively effective and all are temporary in nature, it is important that you immediately begin to plan your strategy to make the most effective use of the new tax benefits.

As with most major tax law changes, it is prudent to review these changes with your planning professionals including your attorney, CPA and financial adviser to maximize tax savings as they relate to your personal estate plan and business. This will afford you the best opportunity to maximize your after-tax business profits.

Craig M. Billmeyer is an attorney and member of Bradshaw, Steele, Cochrane & Berens, L.C. in Cape Girardeau. His practice includes Estate Planning, as well as Corporate and Business Planning.