Manufacturers Get a Boost from New Tax Law
Proposals in New Tax Legislation Would Further Aid Manufacturers
With the signing of the Jobs and Growth Tax Relief Reconciliation Act
(JGTRRA) of 2003, touted as the third largest tax cut in U.S. history,
manufacturers will find some much needed tax relief. While much of the
press has focused on lower rates for individual taxpayers, as well as
dividend and capital gains tax relief, the Treasury estimates that small-
and mid-sized businesses will be a significant beneficiary of the new
law, with enhanced expensing for new investment and additional first-year
“bonus” depreciation deductions.
There are also other proposed changes which would directly impact manufacturers.
These provisions are in a new Senate Finance Committee Bill which is
currently being debated by Congress.
Many of the JGTRRA changes are temporary, lasting only a few years,
and will require yet another act of Congress to make them a permanent
part of the tax law. The following are several of the key tax law changes
that relate to businesses, including manufacturers.
1. INCREASE IN BONUS DEPRECIATION
Last year, the Job Creation and Worker Assistance Act of 2002 provided
for a bonus depreciation deduction equal to 30% of the cost of qualified
property that was acquired after September 10, 2001 and before September
11, 2004, and placed in service before January 1, 2005. The new act
extends the 30% bonus depreciation acquisition period to December 31,
2004. More impressively, however, it establishes a 50% bonus depreciation
deduction for qualified property acquired and placed in service between
May 6, 2003 and December 31, 2005. A manufacturer may elect either 30%
or 50% bonus depreciation if both are available.
To conform the luxury auto depreciation dollar limits to the enhanced
bonus depreciation rules, the new law raises the bonus depreciation
amount that may be taken with respect to automobiles from $4,600 to
$7,650.
2. INCREASE TO $100,000 THE AMOUNT OF SECTION 179 DEPRECIATION ALLOWABLE
Section 179 of the Internal Revenue Code provides manufacturers with
an opportunity to treat the cost of qualifying property as a deduction
rather than a capital expenditure. Qualifying property continues to
be defined as depreciable tangible personal property that is purchased
for the active conduct of a trade or business. Manufacturers are entitled
to an increase in the amount of annual deduction allowed for Section
179 property to $100,000 for the years 2003 through 2005. Businesses
that place more than $400,000 of qualified property in service in any
year are subject to a phase-out of the $100,000 limit. For the years
2004 and 2005, the $100,000 deduction is subject to cost-of-living increases.
Unless extended, the $100,000 allowable expense option reverts to $25,000
in 2006.
Off-the-shelf computer software is added to the definition of items
qualifying as Section 179 property. Qualifying computer software is
defined as software that is readily available for purchase by the general
public, is the subject of a nonexclusive license, and has not been substantially
modified. Database software is not included in the definition of qualifying
computer software except to the extent that such database software is
available in the public domain and is incidental to the operation of
the otherwise qualifying software.
PROPOSED SENATE FINANCE COMMITTEE BILL
The Senate Finance Committee has introduced legislation that would include
several tax breaks for small businesses. The legislation replaces a
tax benefit for U.S. exporters with a corporate tax cut for all manufacturers
who make their products in the United States. Businesses would benefit
because it expands the ability to expense equipment purchases and other
capital investments in the first year instead of depreciating the cost
over time.
The Senate bill, which was approved by the Finance Committee on Oct.
1 does not extend the higher expensing limit but instead makes it more
helpful to businesses who buy expensive equipment. The Senate bill reduces
the limit by only one-half of the amount above $400,000.
Other changes in the bill include making S corporations, partnerships
and sole proprietorships that manufacture products in the United States
eligible for the same deduction that large C corporations receive. The
deduction for domestic production, once fully phased in by 2009, would
have the effect of a three percentage point reduction in the corporate
tax rate for C corporations that manufacture in America. Income for
S corporations, partnerships and sole proprietorships is taxed at the
individual level, so the tax savings for the owners of these businesses
would vary.
Also included in the Senate version is a provision that exempts debenture-based
Small Business Investment Companies from unrelated business taxable
income rules. This could provide more than $500 million in new capital
for SBIC – privately-owned firms that leverage their own capital
with government-based loans to provide equity investments and long-term
loans to small businesses.
The Senate bill also removes an incentive for small businesses to buy
luxury sports utility vehicles. Previously, SUVs that weighed more than
6,000 pounds were eligible for the $100,000 expensing limit, just like
trucks and vans were. The Senate bill would reduce the expensing limit
for large SUVs to $25,000, ending a tax loophole.
The Manufacturing Services Group will keep you informed of further
updates to these and other bills.
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