Will your company — and you — be better off as a result of the tax bill President Bush signed in late May? At first blush, this should be easy to answer. The tax cut is relatively straightforward and it contains no hidden offsetting tax increases or even fees.
Everyone who receives a paycheck will see it get a little fatter right away, and everyone who receives a dividend check or a capital gain will get to keep more of it at tax time. The top rate for dividends and capital gains realized after May 5, 2003, is now 15%, down from a maximum of 38.6% for dividends and 20% for capital gains. (One caution: Dividends from real estate investment trusts are not eligible for capital gains treatment.)
Sole proprietors, partners, and owners of S corporations will benefit from the reductions in individual tax rates, retroactive to January 1, 2003.
But for many companies the answer is not so clear. Traditional C corporations won't benefit unless they buy equipment. If they do, the benefit depends on how much and what type they buy. Proportionately, the largest benefit goes to small buyers.
Those who buy less than $400,000 of new equipment during their '03 tax year can expense $100,000 of that purchase. That's a lot more generous than before, when taxpayers whose total equipment purchases were $200,000 or less could only deduct $25,000.
The amount that can be expensed drops by $1 for each dollar by which a firm's annual investments exceeds $400,000. Thus, taxpayers who buy $500,000 or more of equipment in a tax year do not get to use this expensing provision at all. If they are just above the $500,000 limit, they are at a disadvantage compared to the firm that buys just under $400,000 worth.
All businesses that new buy equipment after May 5, 2003, and place it in service before the end of 2004 are allowed to use a separate expensing provision called a 50% “bonus” depreciation. That is, they can expense 50% of any equipment purchase and write off the rest over its usual depreciable life. That provision replaces the 30% bonus depreciation that applied to new equipment purchased after Sept. 10, 2001 and before Sept. 11, 2004.
Neither bonus depreciation nor small-business expensing helps companies that bought equipment for the year before the effective dates or are not buying equipment this year.
The provisions offer no immediate advantage to companies that are experiencing losses. Those companies may be able to carry current losses against profits on which tax was paid in the previous two years to get a refund. But many already had losses in '01 and '02; they must carry the current losses forward and wait until they're profitable to get any tax benefit from the write-offs. Meanwhile, their profitable competitors can lower their taxes and modernize or expand their fleets at the same time.
Furthermore, faster write-offs are relatively less valuable to trucking firms than to some other businesses because the principal asset for many carriers — tractors — was already eligible for a three-year write-off, with one-third of the cost in the year of purchase.
The bottom line: The new tax law is already making a lot of individual taxpayers and many businesses happy. But other companies may feel left out if they can't justify buying new equipment now or can't use the higher tax write-offs this year. For them, Act II may start later this year in the form of a bill to allow extended carry-backs (something the House approved that was dropped in the final version of the bill President Bush signed). If that act is never written, though, this one could mean “curtains.”