A hodgepodge of phase-ins, sunsets and retroactive provisions in President Bush’s recently passed $350-billion tax cut should keep tax attorneys and accountants busy for a long time.
“There are a lot of provisions that make it very complicated,” said Kim McCarthy, a tax attorney at Partridge Snow & Hahn LLP in Providence.
Key elements of the tax cut for businesses include:
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• Small businesses (with receipts of less than $400,000) can write off up to $100,000 in qualified purchases in 2003 and 2004, up from an earlier limit of $25,000. The law also lets business owners take the entire deduction in the first year, rather than spread out over four years.
• Larger corporations can write off 50 percent of qualified equipment and investments, up from 30 percent.
• A new maximum tax rate on dividends paid to investors of 15 percent, down from the previous 38.6 percent.
• The tax on capital gains from assets owed longer than a year also is lowered to 15 percent, down from 20 percent.
• Individual income tax rates are reduced between 2 percent and 3.6 percent. The majority of small-business owners in the United States file their taxes as individuals, according to the National Federation of Independent Business.
Virtually every provision in the legislation, however, will expire sometime within the next 11 years. The write-off cap for small businesses, for example, reverts to $25,000 in 2005. The dividend and capital-gains tax reductions revert back to the old rates in 2009.
“This one is going to be more complex, no question,” said Grafton “Cap” Willey, managing partner at Rooney, Plotkin & Willey LLP, an accounting firm in Providence. “Keeping track of all the phase-ins and phase-outs certainly adds to the complexity.”
Willey said the firm’s tax partner, David Rooney, followed the tax-cut bill as it winded through Congress, and probably has spent 50 hours combing through the final legislation. One small example of an unresolved gray area, Willey said, is tracking which dividends will qualify for the new maximum tax rate of 15 percent, which requires assets be owned for a minimum number of days.
He said it still is unclear who will be determining those dividend qualifications – CPAs, brokerage houses or the IRS, in the form of a neat 1099 form at the end of the year.
Hans Lundsten, a tax partner at Adler Pollock & Sheehan in Providence, said that because the tax cut tends to pick and choose certain items, many taxpayers might have false assumptions as to which ones were reduced. He cited the example of the capital-gains tax decrease, which does not apply to gains on depreciable property.
“There has been a lot of publicity about the lowering of the capital gain rate, but they didn’t lower all of them, ” Lundsten said. “A real estate investor selling a depreciable property might be surprised to find out that their gain is subject to being taxed at 25 percent.” One “saving grace” to the bill’s complexity, McCarthy said, is a surprisingly useful IRS Web site (www.irs.gov).
“You wouldn’t think of the IRS as having a good Web site, because its forms are so terrible, but they do,” she said. “There is a lot of plain-language explanations about the tax law’s effects.”
– Bloomberg News contributed to this report.
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