- Created on Wednesday, 02 February 2005 16:53
- Written by Mark E. Battersby
The American Jobs Creation Act of 2004, began as a bill to compensate exporters for the repeal of a controversial $5-billion annual tax break labeled as an “illegal trade subsidy’ by the World Trade Organization. Two years later, the law that emerged, the fifth major tax cut in four years, has ballooned into a $145-billion tax break for everyone.The centerpeice of that new tax law, a reduction in the tax rate from 35 percent to 32 percent, was designed to compensate ‘manufacturers’ for the tax breaks repealed by this new law. However, despite our lawmaker’s extremely broad definition of “manufacturers” it is unlikely to benefit many within the laundry industry. A final definition for qualifying ‘manufacturers,’ will come in the form of soon-to-be issued Internal Revenue Service guidelines.
FASTER WRITE-OFFS, LOWER TAX BILLS
Law changes in 2002 raised the threshold for Section 179 write-offs from $25,000 to $100,000. This special, first-year expensing write-off for equipment costs is reduced by the amount by which the cost of qualifying property placed in service by the laundry exceeds $400,000.
Originally designeed as a temporary measure to stimulate the economy, the write-off was scheduled to drop back to $26,000 in 2006. Not only have the higher caps been extended through 2007 due to The Jobs Creation Act, the threshold has been indexed for inflation. In 2004, it is $102,000, with a $410,000 cap. This change carries the indexing through to 2007 as well.
On the depreciation front, lawmakers created a 15-year recovery period for qualified leasehold improvements and restaurant property. Thus, any laundry that between October 22, 2004 and January 1, 2006, modifies, adapts or adds to leased property will create improvements that qualify for a 15-year write-off period.
The old rules required leasehold improvements or additions to be depreciated using straight-line depreciation over the same 39-year period as business property. A qualified leasehold improvement is defined as an improvement to the interior of a building, made by either the lessor or the lessee and placed in service more than three years after the building was first placed in service.
Despite the popularity of limited liability companies (LLCs) and other partnership-type entities, S corporations remain the fastest-growing type business entity. A laundry business operating as an S corporation passes through income and loss to shareholders. The shareholder takes into account their shares of these items on their individual tax returns.
The Jobs Creation Act attempts to reform and simplify the tax treatment of S corporations to encourage their continued growth as the nation’s leading job-creating force. The new law, for example, allows family members to elect to be treated as one shareholder for purposes of determining the number of shareholders of an S corporation. It also increases the maximum number of S corporation shareholders from 75 to 100.
Under current law, most family members are treated as separate shareholders, which limits the laundry’s ability to diversify its investors and therefore better withstand business fluctuations. Now, a husband and wife can include a child or children as S corporation shareholders. They can treat all of them as one shareholder.
MISCELLANEOUS AND THE DOWNSIDE
The ‘cost’ of the Jobs Creation Act to the U.S. Treasury will be offset by closing a number of tax loopholes as well as with other revenue raising measures. Also on the downside, among the loopholes closed under the new law is one that allowed some small-business owners to deduct up to $100,000 of the cost of a luxury sport-utility vehicles (SUVs) on their income tax returns. Because the vehicle caps on depreciation do not apply to cars or trucks weighing more than 6,000 pounds, some laundry owners could deduct up to the full cost of the SUV immediately as a Section 179 expense. Now, under the new law, the deduction for vehicles weighing not more than 14,000 pounds is capped at $25,000, effective for SUVs placed in service after the date of enactment.
The question for many launderers is not whether they will qualify for the new lower tax rates as ‘manufacturers.” Rather, the question is how many of the new write-offs or benefits will your laundry qualify for. Of course, those new ‘revenue raisers’ and stiff penalties also deserve attention.
Quick Rinse - News From Around The World
Fire in Jail Laundry
DURHAM, N.C. — A fire in the laundry room at a County Jail in Durham damaged goods but required no evacuation. The fire, which originated in a dryer, damaged hundreds of uniforms. In addition to the lost goods, the jail’s laundry sustained water and smoke damage. The fire was extinguished by the sprinkler system that had been activated.