President signs tax bill into law
On May 17, the President signed into law the “Tax Increase Prevention and Reconciliation Act of 2005” (H.R. 4297). On May 9, House-Senate conferees reached an agreement on the bill and the House passed it the next day by a vote of 244 to 185. The Senate passed the bill by a 54-44 margin on May 11. The bill is estimated to reduce taxes by $70 billion over the next decade. The major provisions of the bill extend the current rates for capital gains and dividends as well as the enhanced expense method depreciation amount. Also included is an extension of relief from the alternative minimum tax and a special provision involving conversion of a traditional IRA to a Roth IRA.
Here is a selected summary of the major provisions of H.R. 4297:
Title I - Extension and Modification of Certain Provisions
- The enhanced expense method depreciation amount under I.R.C. §179 (presently $108,000) remains in place through 2009 (instead of ending after 2007).
- The favorable tax rates under present law for capital gains and qualified dividend income remains in place through 2010 (instead of ending after 2008)
Title II - Other Provisions
- The “active business requirement” under I.R.C. §355 (with respect to tax-free corporate spin-offs) is simplified such that all corporation’s in the distributing corporation’s and the spun-off subsidiary’s respective affiliated group are considered in determining if the active-business test is satisfied. The provision is effective for distributions occurring after May 17, 2006, though December 31, 2010.
- At the taxpayer’s election, the sale or exchange of musical compositions or copyrights in musical works created by the taxpayer’s personal efforts is treated as the sale or exchange of a capital asset, resulting in a capital gain or loss. The provision is effective for sales or exchanges in tax years beginning after May 17, 2006, and ending before January 1, 2011.
- Music publishers may elect to amortize over five years the advanced payments they make to songwriters. Before the rule change, the income-forecast method had to be utilized. The provision is effective for expenses paid or incurred with respect to property placed in service in taxable years beginning after December 31, 2005.
Title III - Alternative Minimum Tax (AMT) Relief
- For 2006, the AMT exemption amount for married taxpayers would increase to $62,550 and for unmarried individuals to $42,500 (instead of dropping to $45,000 and $33,750, respectively).
- For 2006, nonrefundable personal tax credits (such as the dependent care credit, elderly and disabled credit, Hope Credit, and Lifetime Learning Credit) may be claimed to the full extent of an individual’s regular tax and alternative minimum tax instead of being allowed only to the extent that regular tax liability exceeds tentative minimum tax – i.e., they had been disallowed when determining the AMT.
Title IV - Corporate Estimated Tax Provisions
- The schedule of estimated tax payments for corporations with assets of at least $1 billion is modified such that payments due in July, August and September of 2006 are increased to 105 percent of the payment otherwise due, and the next required payment is reduced accordingly. Payments due in July, August and September of 2012 are increased to 106.25 percent of the payment otherwise due, and the next required payment is reduced accordingly. Finally, payments due in July, August and September of 2013 are increased to 100.75 percent of the payment otherwise due, and the next required payment is reduced accordingly.
- For corporate estimated tax payments due on September 15, 2010, 20.5 percent is not due until October 1, 2010, and for September 15, 2011, 27.5 percent is not due until October 1, 2011.
Title V - Revenue Offset Provisions
- Effective for tax years beginning after 2005, the bill increases the age of minors from 14 to 18 for purposes of subjecting the minor’s unearned income to tax at the parents’ tax rate (the so-called “kiddie tax). An exception applies for a child who is married and files a joint return for the tax year, and for distributions from certain qualified disability trusts.
- Currently, in order to be able to convert from a traditional IRA to a Roth IRA, the taxpayer’s adjusted gross income (AGI) for the year must not exceed $100,000 (for married persons filing jointly). The bill eliminates the $100,000 AGI limit on conversions, effective for tax years beginning after December 31, 2009. For conversions in 2010, unless a taxpayer elects otherwise, the amount includible in gross income as a result of the conversion is included ratably (in equal amounts) in 2011 and 2012. However, if the converted amounts are distributed before 2012, the amount included in the year of the distribution is increased by the amount distributed, and the amount included in income in 2012 (or 2011 and 2012 in the case of a distribution in 2010) is the lesser of: (1) half of the amount includible in income as a result of the conversion; and (2) the remaining portion of such amount not already included in income.
- For tax years beginning after May 17, 2006, the bill modifies the wage limitation rule for purposes of the manufacturer’s deduction (I.R.C. §199) that was created as part of the 2004 Jobs Bill. As originally enacted the manufacturing deduction was limited to 50 percent of a business’ employee wages reported on Form W-2. In other words, the limitation had been 50 percent of those wages that were deducted in arriving at qualified production activity income. As modified, taxpayers are only able to include amounts which are properly allocable to domestic production gross receipts. That could limit the availability of the deduction for businesses that use a significant amount of independent contractors or rely on the wages of executives and management personnel (who are not involved in actual production activities). In addition, the rule that places a limitation on wages treated as allocated to partners or shareholders or pass-through entities is repealed. This provision is also effective for tax years beginning after May 17, 2006.
- Effective for amounts paid or incurred after May 17, 2006, the 2-year amortization period for geological and geophysical (G&G) costs is extended to 5 years for certain major integrated oil companies. The 5-year amortization rule for G&G costs applies only to integrated oil companies that have an average daily worldwide production of crude oil of at least 500,000 barrels for the tax year, gross receipts in excess of $1 billion in the last year ending during calendar year 2005, and an ownership interest in a crude oil refiner of 15 percent or more.
- Information reporting is required for tax-exempt interest paid on tax-exempt bonds after December 31, 2005. For IRS offers-in-compromise submitted on or after July 16, 2006, taxpayers must make partial payments to the IRS while the offer is being considered. For lump-sum offers (which include single payments, as well as payments made in 5 or fewer installments), taxpayers must make a downpayment of 20 percent of the amount of the offer with any application. User fees are eliminated for offers submitted with the appropriate partial payment. Submitted offers that are not accompanied with the appropriate payment will be returned as unprocessable and IRS may take immediate enforcement action. Also, an offer is deemed accepted if the IRS does not make a decision with respect to the offer within two years from the date the offer was submitted.
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