August 3, 2004
Mid-Year Planning and Tax Bill passed by Congress
We are at the mid-year mark for tax season and a good time to think about tax planning before year end. Congress is debating more tax cuts and extensions of current incentives that make planning necessary and can be challenging. Some of these new tax changes may have significant impact on your business and some readjustment may be needed in order to reach your 2004 goals.
Big tax bill passed by Congress
Major tax legislation has been passed by both the House and Senate. Bills repealing the extraterritorial income regime (ETI) in the Tax Code include a host of other tax measures. Some of the tax incentives are the same in the House and Senate bills. Others are not. Before Congress can pass a final bill, the House and Senate must agree on one version.
Here are a few of the tax incentives for your planning:
SMALL BUSINESS EXPENSING: Several years ago, Congress increased the amount small businesses can expense, that is immediately deduct, each year. The higher amount, $100,000 (indexed for inflation), is only temporary. If Congress doesn't make it permanent or extend it, small business expensing could fall back to $25,000. If you're thinking about investing in new equipment, you may want to make a purchase or plan a purchase for 2004.
CORPORATE TAX CUT: In place of the ETI regime, which the World Trade Organization ruled is an illegal trade subsidy; Congress may lower the corporate income tax rates. The top rate could fall as much as three points. Congress also needs to decide which businesses will be eligible for lower corporate tax rates. Some lawmakers want to extend the lower rates to all manufacturers and small businesses.
CHILD TAX CREDIT: Many taxpayers received an advance on their higher child tax credit in 2003 and they may be expecting a check this year. They won’t be getting one. When Congress voted to boost the child tax credit to $1,000 it made the higher credit temporary just for the 2003 and 2004 years. Advance payments were only sent in 2003. Unless Congress acts, the credit will fall to $700 in 2005. The House bill would keep the credit at $1,000.
HOMEOWNERS: The Senate bill would permit homeowners to deduct mortgage insurance private and federal mortgage insurance generally would qualify. The Senate also voted to create some cuts for energy-efficient improvements to residential housing. If you’re thinking about adding energy-efficient windows or an alternative fuel source, such as a solar heating unit, you may want to wait and see if Congress enacts these energy incentives.
EXTENDERS: Some tax credits and deductions have been around so long they seem permanent. This is not the case. Congress just continues to extend them. Last year, some popular incentives expired. They maybe extended in the big tax bill this summer or in other legislation. These include the teacher’s classroom expense deduction, corporate donations of computers and scientific equipment, the Welfare to Work Opportunity Tax Credit, and the research tax credit.
These are only some of the incentives Congress is reviewing. The proposed bills are huge; the version for Senate approval is more than 900 pages! For more information and how to get started on mid-year planning, contact our office today.
If you have a 401K plan currently in place, now is a good time for review to ensure the plan is on track or to make any needed adjustments before the end of the year.
Information that will be needed for this re-evaluation:
- YTD pay stubs
- Quick Books disks
- Information on new items and changes
Pension Plans and 401K
If you are considering a Pension Plan or 401K for your business, a Simple-IRA needs to set up by September 30, 2004. In order for all the appropriate forms to be completed to meet the deadline, please contact my office no later than September 1st to start the process.
A SIMPLE IRA plan - Savings Incentive Match Plan for Employees of Small Employers - is an IRA-based plan that allows employees to elect to defer a part of their salaries into the plan for retirement. Because this is a simplified plan, the administrative costs should be lower than for other, more complex plans. Under a SIMPLE IRA plan, employees and employers make contributions to Individual Retirement Arrangements (IRAs) set up for employees, subject to certain percentage-of-pay and dollar limits.
With a SIMPLE IRA plan, you:
- Make either a contribution matching your employees’ contributions dollar-for-dollar up to 3% of pay or a 2% nonelective contribution for each eligible employee. (Under the “nonelective” contribution formula, even if an eligible employee doesn’t contribute to his or her SIMPLE IRA, that employee must still receive an employer contribution to his or her SIMPLE IRA equal to 2% of his or her salary.)
- Cannot have any other retirement plan.
Profit Sharing Plans
To set up a new Profit Sharing Plan for your business, please contact my office no later than December 1st so that we can complete all the necessary paper work required and meet the December 31st deadline.
- You don’t need profits in order to make contributions to a profit-sharing plan. Of course, having a profit would probably make it easier to actually contribute something.
- Contributions to a profit-sharing plan are discretionary. There is no set amount that you need to make. If you can afford to make some amount of contributions to the plan, then go ahead.
- If you do make contributions, you will need to have a set formula for determining how the contributions are divided. This money goes into a separate account for each employee.
- One common method for determining each participant’s allocation in a profit-sharing plan is the “comp-to comp” method. Under this method, the employer calculates the sum of all of its employees’ compensation (the total “comp”). To determine each employee’s allocation of the employer’s contribution, you divide the employee’s compensation (employee “comp”) by the total comp. You then multiply each employee’s fraction by the amount of the employer contribution. Using this method will get you each employee’s share of the employer contribution.
If you establish a profit-sharing plan, you:
- Can have other retirement plans.
- Can be a business of any size.
- Need to annually file a Form 5500.
- As with 401(k) plans, you can make a profit-sharing plan as simple or as complex as you want to.
Pros and Cons:
- Greater flexibility in contributions – contributions are strictly discretionary.
- Good plan if cash flow is an issue.
- Administrative costs may be higher than under more basic arrangements.
- Need to test that benefits do not discriminate in favor of the highly compensated employees.
- Who Contributes: Employer contributions only.
- Contribution Limits: The lesser of 25% of compensation or $41,000.
- Filing Requirements: Annual filing of Form 5500 is required.
- Participant Loans: Permitted.
- In-Service Withdrawals: Yes, but subject to possible 10% penalty if under age 59-1/2.
Now is the perfect time to review all your tax goals and make sure they are on track and to make any adjustments before the year is over. Please contact our office today for an appointment at (303) 468-3490.
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