2003 Tax Law Effective Dates Require Careful Application

By Peter Pfister, CPA

In the past, new tax legislation became effective on the “date of enactment,” the date the law is signed by the president. The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) was signed on May 28, 2003. It has no major provision that takes effect on the date of enactment. There are many retroactive provisions, which require close attention in order to gain an advantage under the new law. Issues may arise in transactions related to the following items.

1. Income tax rate reductions are effective January 1, 2003. New withholding tables are already in place. Those that make estimated payments should contact our office for a planning session to recalculate their estimated liabilities and reduce future payments. There has been no change to estimated tax penalty rules so any reductions to tax liabilities that we suggest would take the estimated tax penalty rules into account.
2. Dividends will be taxed at 15% beginning for dividends received after December 31, 2002. For example, a company declares a dividend in December 2002, payable in January 2003. In order to qualify for the new 15% rate, the stock must be held for at least 60 days during the 120-day period beginning on the date that is 60 days before the date on which the stock goes ex-dividend. Also, the lower rates don’t apply to dividends received in tax-deferred accounts (IRAs, 401k, etc.). Regular tax rates apply when these amounts are eventually withdrawn as part of retirement plan distributions.
3. The maximum net capital gains tax rate is reduced from 20% to 15%, effective for sales on or after May 6, 2003. The sale date not the contract date will prevail. For security transactions the trade date is the date to take into account. For short sales of securities the date to use is the settlement date. Installment sales are governed by the date payment is received. Therefore payments received on or after May 6, 2003 will be taxed at the new lower capital gain rates. For mutual fund investors, capital gain determination is made by the fund and it should provide the investor with that information. It will be very important to keep track of all capital asset transaction dates in order to help us determine the proper taxation of the sale.
4. On the deduction side, the first year bonus depreciation allowance percentage has increased from 30% to 50%. To qualify, new business property (it cannot be used property) must be acquired after May 5, 2003, and placed in service before January 1, 2005. The 50% rate does not apply if a binding written contract for acquisition of the property was in effect before May 6, 2003. Property that is manufactured, constructed, or produced for a taxpayer’s own use will qualify for the 50% bonus depreciation if the taxpayer begins manufacture, construction, or production after May 5, 2003. Qualifying assets purchased prior to May 6, 2003 still qualify for the 30% first year bonus depreciation.
5. The code section 179 expense for first year expensing of qualifying asset purchases increases to $100,000 from the previous $25,000. This increase is effective for purchases after December 31, 2002 and ends at December 31, 2005. In a majority of cases, most businesses will be able to expense the cost of asset additions in the year of purchase. The code section 179 expense is applied first before taking into account bonus depreciation referred to above.
6. Automobiles used for business will also see an increase in the first year depreciation expense. The increased 50% first year bonus depreciation applies to new car purchases on or after May 6, 2003. The maximum first year deduction is increased to $10,710. New cars purchased prior to May 6, 2003 remain eligible for the 30% first year bonus depreciation. Purchases of used cars are not eligible for bonus depreciation.

In summary, accurate records, especially purchase and sale dates are needed to help determine which aspect of the tax law applies. We see some complex items on the horizon, for example, an expanded Schedule D form for capital gains to track various sales dates to determine ultimate taxation. Businesses will have opportunities to expense most if not all of their current year purchases. Call or email our office for any additional questions as to how the new law affects you directly.