American Jobs Creation Act of 2004: How Auto Dealers Are Affected
By Jeff Brogley
Auto Dealer Advisor, 2005 Winter
Congress has recently enacted the American Jobs Creation Act of 2004, one of the most sweeping tax law changes for corporate and individual taxpayers in more than 20 years. The Act may affect auto dealers in the following manner:
Two-Year Extension of Increased Expensing for Small Businesses: The $100,000 per year amount of the cost of qualifying property placed in service under Code Section 179 has been extended by two years (until December 31, 2007), so long as total assets placed in service do not exceed $400,000. Under prior law, the $100,000 per year amount was set to expire December 31, 2005.
Increased Recovery Period for Depreciation of Certain Leasehold Improvements: Qualified Leasehold Improvements (as defined as improvements to an interior portion of a commercial building (not owned by a related party) which is more than three years old but does not include enlargements or elevators) may be depreciated over 15 years under the straight line method of depreciation for leaseholds placed in service after October 22, 2004 and before January 1, 2006. Those improvements placed in service before December 31, 2004 may be eligible for the 50 percent bonus depreciation deduction. Under prior law, most leasehold improvements were depreciated over a 39 year life.
S Corporation Reform & Simplification: Rules pertaining to eligible shareholders:
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Increase in number of eligible shareholders to 100 (from 75).
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Treatment of all family members as one shareholder rather than husband and wife counting as one shareholder and each separate family member as an additional shareholder.
Rules regarding inadvertent Qualified Sub Chapter S Elections and Terminations:
Deduction of State & Local General Sales Taxes in Lieu of State & Local Income Taxes: The Act provides an election (effective for the entire tax year of 2004) to either: 1) deduct their State Income Taxes or 2) deduct their State Sales Tax. State Property Taxes remain deductible as before. If the election is made to deduct the state sales tax you can a) get all of your receipts together and deduct the actual sales tax paid or b) use a table to be produced by the IRS that takes into account the state you live in, your income, and your dependants. If you use the table, you will also get to add major purchases, including cars, boats, and other items specified by the IRS (the major entertainment system or SUV tires will probably not be in the list of major purchases). The tables will only go up to $142,700 for 2004, so most dealers will have to save their receipts if they want to deduct more on their personal returns.
For states that have both high sales taxes and high income taxes, dealers have to choose one (preferably the higher one of the two). Dealers cannot deduct both. In states that do not have State Income Taxes (like Texas), the ability to deduct Sales Taxes is an additional itemized deduction on the dealer’s 2004 income tax return.
Withholding on Bonuses Paid in Excess of $1,000,000: Effective for payments after December 31, 2003, dealership bonuses paid to the dealer or other employees in excess of $1,000,000 are subject to withholding at the highest rate (35 percent for 2004 and 2005), regardless of any other with holding rules and regardless of the employee’s Form W-4.
Limitation of Employer Deduction for Personal Use of Company Aircraft: Expenses paid for entertainment, amusement, or recreation facilities (i.e., an airplane) on behalf of officers, directors, and 10 percent or greater owners are no longer able to be deducted in full (even if income is imputed or included to the individual for personal use). No deduction is allowed to the extent that such expenses exceed the amount treated as compensation or is puted/included in income for the individual.
Observation
These changes may not have significant impact as most S Corporation dealerships are usually owned by a limited number of people.
