It began as a bill to compensate exporters for the repeal of a controversial $5 billion annual tax break that had been labeled as an “illegal trade subsidy” by the World Trade Organization (WTO). That bill has ballooned into a $145 billion tax break that will benefit many alarm installers, dealers and integrators: the American Jobs Creation Act of 2004.
At more than 630 pages long with at least 270 provisions, the new tax law — the fifth major tax cut signed into law within the past four years — contains something for many “special interest” groups. It also has new tax deductions and restrictions for those in the alarm industry.
Alarm companies can take advantage of several expanded and continued write-offs, including deductions for equipment costs and improving a company’s building. In an industry heavy on family-owned businesses, the new law’s provisions on “S corporations” will be of interest.
At the same time, business owners also need to know that some tax loopholes they took advantage of in the past have been eliminated, while the law cracks down on tax shelters. Despite our lawmakers’ extremely broad definition of “manufacturers,” the centerpiece tax cut of this new legislation — a tax rate reduction of 3 percent — is unlikely to apply to many within the alarm and security industries. That doesn’t mean the Jobs Creation Act is without its benefits for contractors and integrators.
Faster, Bigger Write-offs Mean Lower Tax Bills
Although few security operations are likely to benefit from the new lower tax rate for “manufacturers,” lawmakers extended the 2002 rules that 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 cost of qualifying property placed in service by the alarm installer or integrator — or their customers — that exceeds $400,000.
Originally designed 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, 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. Thus, any alarm installer or integrator that modifies, adapts or adds to the operation’s business premises between Oct. 22, 2004 and before Jan. 1, 2006 will qualify for a 15-year write-off period for the cost of the improvements.
The old rules required leasehold improvements or additions 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 and placed in service more than three years after the building was completed.
S Corporation Status Brings Benefits to Alarm Companies
Despite the popularity of limited liability companies (LLCs) and other partnership-type entities, “S corporations” remain the fastest-growing business entity.
An alarm or security business operating as an S corporation passes income and loss to shareholders. The shareholder takes into account their shares of these items on their individual tax returns. An S corporation is one that receives IRS approval to be taxed under Subchapter S of the Internal Revenue Code. As a legal entity, the S corporation is separate and distinct from the corporation’s owners and can be a way to avoid double taxation.
The new law attempts to reform and simplify the tax treatment of S corporations to encourage their continued growth as the nation’s leading job-creating force.
For example, the new law allows family members to all 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 security or alarm business’s ability to diversify its investors and 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.
Another front to the new law deals with losses and deductions disallowed in the past because an S corporation shareholder had an insufficient basis in the stock, which were usually lost once the shares are transferred. Thanks to the new law, those suspended losses and deductions may be transferred to a spouse or former spouse as part of a divorce settlement. The suspended loss or deduction will be treated as incurred by the S corporation in the succeeding tax year for purposes of these unique transfers.
The new law will also:
- Allow employee stock ownership plans (ESOPs) to repay exempt loans using the proceeds from an S corporation without jeopardizing its status as an ESOP.
- Ease the rules for determining potential current beneficiaries of an electing small business trust.
- Permit distributions from an ESOP maintained by an S corporation.
Installers or integrators reorganizing an existing business or starting a new one will want to look long and hard at the new S corporation rules and the many new benefits this entity can offer every business.
New Law Cracks Down on Tax Loopholes, Shelters
Closing a number of tax loopholes will offset part of the “cost” of this new law to the U.S. Treasury.
Among those loopholes 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, installers and dealers could previously deduct up to the full cost of the SUV immediately as a Section 179 expense.
Under the new law, however, the deduction for vehicles weighing no more than 14,000 pounds is capped at $25,000, effective for SUVs placed in service after Oct. 22.
Those revenue-raising provisions are permanent while the majority of tax cuts have only a temporary life. What’s more, many of the provisions in the new law require immediate action to maximize benefits and avoid problems.
Remember, however, that effective dates vary from provision to provision. Thus, while the approach taken by our lawmakers may have reduced tax bills at no cost to the Treasury, the bottom-line effect may be confusion.
The law also takes aim at companies conducting “corporate inversions,” which involve a company switching its headquarters in name only to an overseas tax haven to lower or eliminate U.S. taxes. In reality, the clampdown on these companies is not as strong as many lawmakers would have preferred.
There is also a provision that requires increased reporting for noncash charitable contributions. It extends to incorporated alarm or security businesses a requirement that a donor obtain a qualified appraisal of the donated property if the amount of the claimed deduction is more than $5,000. Similarly, if the amount of that contributed property — other than cash, inventory or publicly traded securities — exceeds $500,000, the appraisal must be attached to the annual tax return.
As for those tax schemes utilized by so many small business owners to shelter profits from the sale of their businesses from the tax collector’s grasp, the new law contains 21 provisions that crack down on tax shelters, including a measure that denies a deduction of interest on certain convertible debt instruments.
The bill also requires companies and individuals to disclose to the IRS details about tax shelters and b
oosts penalties for failing to do so.
For returns and statements due after last Oct. 22, the law added a penalty for failing to disclose reportable transactions regardless of whether the transaction ultimately results in an understatement of tax. The penalty is $10,000 for an individual, $50,000 for businesses. If the shelter is a “listed transaction” the penalty skyrockets to $200,000, or $100,000 for individuals).
For those dealers and integrators who may be less than truthful on their business or personal tax returns, the new law creates an accuracy-related penalty for reportable and listed transactions.
Lawmakers granted the IRS discretion in applying the penalties. The IRS is likely to continue its “carrot and- stick” approach with taxpayers suspected of participating – or promoting -abusive shelters.
Jobs Creation Act Will Save Businesses Billions in Taxes
The American Jobs Creation Act of 2004 will save alarm dealers, integrators and other taxpayers an estimated $145 billion in taxes during the next 10 years.
The law’s 276 provisions benefit restaurant owners and Hollywood producers, makers of bows, arrows, tackle boxes and sonar fish finders, NASCAR track owners, native Alaskan whalers and even importers of Chinese ceiling fans. The centerpiece of this new law is expected to lower the tax rate on the profits of incorporated “domestic producers” from 35 percent to 32 percent.
Although few within the alarm industry are expected to qualify for the lower effective tax rates, many of the other provisions in this massive new tax law will have a significant impact.
