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Article:
Tax Incentives Lead to Opportunities in North Mississippi
By David R. Hardy
DBJ Contributing Writer
There has never been a better time to invest in North Mississippi
business and maximize your return using various tax incentives
and law changes instituted by the Bush administration.
Well-known
national economist Barry Asmus, speaking in January at the
Northeast Mississippi Economic Forecast Conference in Tupelo,
says that Mississippi has the best chance of any state in
the union of becoming a true economic “miracle state”.
Regional investment wizard Stacey Wall, President and CEO
of Pinnacle Trust, says in 2004, investors should see a
year of strong economic growth with mild inflationary pressure.
No one needs to remind us where North Mississippi fits into
this picture. Experiencing record growth in retail sales,
housing starts, and virtually every other economic indicator,
numerous counties in North Mississippi have entered the
national rankings.
The
President has signed into law three major tax acts in the
last three years: The Economic Growth and Tax Relief Reconciliation
Act of 2001 (EGTRRA), the Job Creation and Worker Assistance
Act of 2002 (JCWAA), and the Jobs and Growth Tax Relief
Reconciliation Act of 2003 (JGTRRA). Additionally, the President
proposed, in his January 2004 State of the Union Address,
that the tax provisions in these acts are made permanent
rather than phasing out in the next few years as originally
planned.
Under
the new laws, taxpayers are awarded:
-
Lower
base tax rates – Rates in each of the top four tax
brackets dropped by 2% or more, retroactive to January
1, 2003. Rates in the 10% and 15% brackets do not change,
but the 10% bracket expands to include more income - $1,000
more for single filers, $2,000 more for married filers.
-
Significant
reductions in taxes on investment income - The top rate
on most dividends and long-term capital gains drops to
15% through 2008. If you’re in the lower two tax
brackets, the new rate will be 5% through 2007 and 0%
in 2008. Previously, you paid tax on dividends at ordinary
income rates. Most capital gains were taxed at 20%, or
10% for those in lower brackets. The new lower rates apply
to dividends received in 2003 and to capital gains realized
after May 5, 2003. Rates will go back to their old levels
in 2009 unless Congress follows President Bush’s
lead and makes the new rules permanent.
-
Significant
changes in depreciation rules that allow more depreciation
to be used earlier, thereby reducing taxable income -
From 2003 through 2005, small businesses can take an immediate
tax write-off for up to $100,000 of most equipment purchased
each year. The previous limit for 2003 was $25,000. This
benefit begins to phase out when total annual equipment
purchases exceed $400,000, an increase from the previous
$200,000 threshold. All businesses can claim bonus first-year
depreciation of 50% of the cost of new equipment. This
break applies to most equipment purchased and placed in
service after May 5, 2003, and before January 1, 2005.
-
Taxpayers investing in commercial buildings have also
been the recipients of several favorable court decisions
and IRS rulings allowing, in addition to the above changes,
the segregation of certain building components to shorter
depreciation periods, thereby accelerating depreciation
and reducing taxable income. This procedure, dubbed “costs
segregation”, can generate significant tax savings.
A large portion of most buildings ( +- 30% ) is comprised
of tangible personal property which may be depreciated
over a 5 year period. Additionally, land improvements
may depreciate over 15 years. Typically, in the past,
these two building components were required to be classified
in the total real property cost and depreciated over 39
years. Several Tax Court rulings have clarified the definition
of tangible personal property and availed us of this entirely
new method of treating capitalized costs of building components.
Example:
A taxpayer building a $1,500,000 facility in 2002 may be
able to identify $500,000 of components to classify as tangible
personal property. Assuming the new bonus depreciation rules
provided by JCWAA apply, the taxpayer could save approximately
$75,000 in 2002 and over $125,000 in the first four years
combined. Actual net savings must be calculated after consideration
of depreciation amounts deferred to future years and segregation
study costs. As in any tax issue, each individual circumstance
is unique and could vary materially from case to case.
The
key tax areas discussed above were designed to help stimulate
the economy. Many of us will realize immediate benefit as
the laws are retroactive to 2003. There is great expectancy
that Congress will agree with President Bush and make the
laws permanent; however, in an election year, no one can
really predict an outcome. One thing is for sure; the laws
are in effect as we speak and those that take advantage
of them stand to reap the benefits. The window of opportunity
may be small so don’t wait.
Because
of the complexity of any tax matter and the uniqueness of
each individual’s circumstance, a qualified professional
should be consulted when addressing any of the above areas.
David
R. Hardy, CPA is a Partner with the Jackson based CPA firm
of Smith Turner & Reeves, P.A. resident in the Oxford
office. Mr. Hardy provides audit and consulting services
to businesses throughout the mid south.
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