After electing first-year expensing, so-called "bonus" depreciation kicks in. Business owners may deduct 50% of the cost of new equipment that has a depreciable life of 20 years or less, if acquired after May 5. If purchased before then, or if acquired pursuant to a binding written contract that was in effect before May 6, you get 30%. Remaining asset costs are depreciated under the regular system, MACRS.
When fully coordinated, the three depreciation deductions-Section 179, the bonus and regular depreciation-combine to generate outsized tax savings. For instance, a client who buys $250,000 of qualifying property may be able to deduct 76% of it, or $190,000. How? The first $100,000 may be written off under Section 179. The remaining $150,000 is available for bonus depreciation, producing another $75,000 of write-off. That leaves $75,000 to depreciate via MACRS, yielding $15,000 more in deductions, assuming five-year property such as automobiles and computers. When purchasing assets with differing depreciable lives, it is best to apply Section 179 to the longest-lived, according to the brain trust at CCH Inc. That leaves MACRS depreciation for property with the shortest lives-assets that generate larger yearly deductions.
Bonus depreciation is only available this year and next, so clearly there is incentive for capital spending by business owners-a variable that, at least in theory, stimulates the economy. By articulately and convincingly demonstrating the potential tax savings to clients, advisors can help lead the charge to economic recovery.
New IRA Deadlines For 2003 Year-End
Final required minimum distribution regulations issued last year impose three deadlines on IRA inheritors.
October 31 is the one-time remedial deadline for trusts that previously failed to provide required documentation to IRA custodians on a timely basis. "If there wasn't compliance with trust reporting requirements in the past, there is now an opportunity to qualify trust beneficiaries as designated beneficiaries and possibly extend payout of the account," says David M. Spitzberg, a CPA in Jenkintown, Pa. By Halloween, the trustee must furnish the custodian with a copy or summary of the trust document indicating the trust beneficiaries as of September 30 in the year following the IRA owner's death.
Another chance to fix old problems expires New Year's Eve. Account inheritors taking distributions under the five-year rule because the owner died before the required beginning date can switch to withdrawing over the life expectancy of the designated beneficiary if, by December 31, they take out amounts that would have been distributed to them had the life-expectancy rules then in effect been followed ("catch-up" distributions). This year's withdrawal, however, is based on the new rules, Spitzberg says.
The deadline with perhaps the widest applicability is the final regs' onus on beneficiaries who inherited an IRA after a post-1985 death. By December 31, these beneficiaries must redetermine the account's designated beneficiary by applying the final rules to the old facts, says CPA Michael Jones, a partner at Thompson Jones LLP in Monterey, Calif. Locate the beneficiary designation form in effect at the death and ascertain whether any named beneficiaries were eliminated by September 30 of the following year. Next, look up the designated beneficiary's life expectancy in the new Single Life Expectancy table issued last summer (in IRS Publication 590, Appendix C), using the age attained in the year after death. Then reduce that by 1.0 for every year since to determine the denominator for the 2003 required-withdrawal calculation, Jones says.
It is possible that redetermination will change the designated beneficiary and, hence, the life controlling payout of the account. "By year end," says Jones, "you've got to figure out the correct measuring life and withdraw the correct amount to avoid the 50% tax for failing to distribute enough."