Tax changes: here and in the works

You may not have noticed it yet, but there have already been several tax changes in 2005. More are in the wings, and others are likely, whether or not the President's new tax commission comes up with an overhaul plan. If you bought a truck or other equipment in '03 or '04, you were eligible for bonus depreciation. That provision, which allowed businesses to deduct more of the cost of new equipment

You may not have noticed it yet, but there have already been several tax changes in 2005. More are in the wings, and others are likely, whether or not the President's new tax commission comes up with an overhaul plan.

If you bought a truck or other equipment in '03 or '04, you were eligible for “bonus depreciation.” That provision, which allowed businesses to deduct more of the cost of new equipment in the first year than usual, expired at the end of '04. (A separate provision, which allowed businesses that buy less than $400,000 of equipment in one year to deduct the first $100,000 immediately, remains in effect through '07.)

Several excise tax changes also took effect at the beginning of 2005. One change affects anyone who buys truck tires. Tires are now taxed based on their maximum load rating, not their actual weight. There will be winners and losers, depending on the type of tire you buy. Super singles in particular may be taxed less than before.

Another set of changes applies to mobile machinery — equipment that operates off-road but uses public highways to reach a jobsite under its own power. Congress wrote the exemption from federal fuel, truck, tire and highway use taxes for these vehicles into law, but limited the benefits. Vehicle owners must use taxable fuel, and at year-end can take a credit for fuel purchased only if they can show they drove less than 7,500 miles on highways. Also, tires on mobile machinery are now exempt only if they are not designed for highway use.

The highway use tax also will change this year. As of July 1, you will have to pay the full tax in one gulp instead of having the option of paying it in four quarterly installments. Canadian and Mexican vehicles will no longer be eligible for a 25% discount on the tax. On the positive side, if you sell or wreck a vehicle, you will be able to claim a refund or credit, which was not possible under prior law.

Businesses that import, sell or transport fuels face a number of new requirements designed to make sure the government gets the full tax on gasoline, diesel fuel and blends. This shouldn't affect fleets that have been paying full price for diesel, but it may force the cheats to pay more.

There is one break for fuel buyers. Congress lowered the tax rate for biodiesel, which is typically sold as a blend with petroleum-based diesel. A common blend rate is known as B-20, 20% of which is renewable-source fuel and 80% traditional diesel. But what Congress giveth, some states may take away. Several will be considering fuel tax increases this year.

The biggest change of all may come about through Congress inaction. On March 31, the 0.1¢/gal. Leaking Underground Storage Tank (LUST) Trust Fund fuel tax will expire unless Congress extends it. And on September 30, all federal Highway Trust Fund taxes will expire. It's very unlikely Congress will allow that to happen.

But there are a few members who believe all highway spending should be funded at the state level. If they simply block final passage of an extension, the diesel rate will fall from 24.4¢/gal. to 4.3¢ (4.4¢ if the LUST tax is renewed), and the truck, tire and use taxes would vanish. More likely, Congress will agree at the last minute to a new highway bill, which could contain further excise tax revisions.

The bottom line: Most of what you read this year about taxes will be about income and social security tax restructuring plans that may be enacted. Meanwhile, the less sexy but still expensive federal excise taxes have already changed, and could have even more dramatic changes ahead.

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