SPI: Public Policy: Tax Issue Brief

legislative and regulatory affairs

SPI Issue Brief

Corporate and Business Provisions
of the
Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA)

Summary:
President bush signed into law May 28, 2003, the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), an estimated $350-billion tax package that was widely debated in Congress. The Act provides many incentives for plastics companies to make investment decisions in a more favorable tax environment.

This report summarizes some key business and corporate tax provisions of the Act that may provide tax relief for the U.S. plastics industry.

Depreciation and Business Expensing Incentives:
It is estimated that small business will be the primary beneficiary of the new law, with improved expensing and first-year "bonus" depreciation, all of which may add up to substantial savings for plastics companies.

Larger businesses also will share in the benefits of the new law. While there is a dollar limitation on equipment purchases for expensing, the bonus depreciation carries no limitation. Below is a summary of two important business provisions in the JGTRRA.

Small Business Expensing: Before passage of the JGTRAA, businesses could deduct from their taxes up to $25,000 of the cost of tangible business property that was placed in service during the taxable year. The full benefit, however, could be realized only when qualifying property did not exceed $200,000 -- a nod to smaller businesses.

The new law, however, increases the maximum that can be deducted and expands the categories of property that qualifies for this treatment. Beginning in 2003, the amount of the qualifying expenses that may be deducted is increased to $100,000. In addition, the phase-out threshold is increased to $400,000 and will be indexed for inflation in 2004 and 2005.

The JGTRRA also permits taxpayers to expense off-the-shelf computer software used in 2003-2005 as qualifying property, which was not allowed before enactment of the Act. Furthermore, taxpayers are now allowed to make or revoke expensing elections on amended returns without first obtaining IRS approval.

Bonus Depreciation Allowance: Taxpayers may depreciate property used in a trade or business when that property is used for the production of income. The JGTRRA expands upon a law passed in 2002 that allows a first-year depreciation deduction equal to 30 percent of certain qualified property. The JGTRRA permits taxpayers to recognize a first-year depreciation deduction equal to 50 percent of the adjusted basis of qualified property for property acquired after May 5, 2003, and before January 2005. For property with a recovery period of at least 10 years and certain transportation property, the placed in service dates is extended to January 1, 2006.

The 50 percent bonus depreciation incentive applies to categories of assets that traditionally have not been covered by depreciation rules. For example, qualified leasehold improvements qualify for the bonus depreciation incentive, but not for the expensing provision. A qualified leasehold improvement includes those improvements to an interior of a building that is nonresidential and must be made pursuant to a lease. Qualified property acquired by a taxpayer in a like-kind exchange or an involuntary conversion is now, under the law, eligible for the 50-percent bonus depreciation incentive.

According to tax experts, the 50-percent first-year bonus is not on top of the 30-percent bonus that was passed by Congress in 2002. However, companies may now combine the increased expensing write-off with a 50-percent write-off of the remaining basis during the first year of service. Bonus depreciation is only permitted on brand new property and expensing may be utilized on new or used property.

Example of Provision's Impact on Plastics Industry
In July 2003, a plastics molding company agreed to purchase a new injection molding machine for $400,000. The equipment is considered five-year property under the modified accelerated cost recovery system rules and will be placed in service on September 1, 2003. Under the new law, the company will be able to expense $280,0000, or 70 percent, or the equipment cost during 2003.

Equipment Cost July 2003	$400,000
JGTRRA Small business expensing deduction	(100,000)
	$300,000
JGTRRA 50 percent first-year depreciation	(150,000)
	$150,000
Modified Accelerated Cost Recovery System depreciation (200 percent declining balance method and half-year convention)	(30,000)
Balance (expensed in subsequent years according to the normal modified accelerated cost recovery system depreciation rules)	$120,000

Capital gains and dividends:
After May 5, 2003, gains on most capital assets held longer than one year will be taxed at a maximum rate of 15 percent, down from 20 percent. The tax rate on capital gains drops to 5 percent - instead of 10 percent - if that gain would otherwise be taxed at 10 or 15 percent. These new rates are effective for sales and exchanges on or after May 6, 2003, and through December 31, 2007. The 15-percent rate continues through 2008

Information contained in this issue brief is based on information from the following sources: Summary of Conference Agreement on H.R. 2, the Jobs and Growth Tax Relief Reconciliation Act of 2003, found at http://www.house.gov/jct/x-54-03.pdf; Mann Frankfort Stein & Lipp, located at http://www.mfslhou.com/services/tax-legislation.htm; Venable, LLP, found at http://www.venable.com/publication.cfm?publication_type_ID=20&publication_ID=1024; and CCHGroup, which can be reviewed at http://tax.cchgroup.com/specialreport/federal/ SPI cannot be held liable for the information contained in this report. Readers are encouraged to seek professional tax counsel regarding any matters contained in this report.

More Public Policy: Environment . Worker Safety . Transportation . Codes and Standards . Food, Drug,and Cosmetic Packaging . International Trade . Other Issues