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  The Tax Prophet Newsletter Issue #16, October, 2004

In This Issue:
Small Companies
Charity Deduction
Real Estate
Tax Collection

American Jobs Creation Act of 2004

Introduction On October 22, President Bush signed into law the so-called "American Jobs Creation Act of 2004," a tax package that has little to do with creating American jobs, but containing loads of special interest tax breaks for large companies with overseas operations. Buried in the bill are several surprises that will affect individual taxpayers and small companies.

Small Companies The current write-off (expensing in full in the year of purchase) for business equipment up to $100,000 per year will be extended to tax year 2008. Off-the-shelf software is now eligible for the write-off.

Write-offs for SUVs However, you can no longer write-off your Hummer in full. The "SUV loophole" (automobiles weighing more than 6,000 pounds) allowing such vehicles a full write-off of up to $100,000 as business equipment, has been scaled back. Effective as of October 22, 2004, these vehicles are limited to a $25,000 write-off.

Individuals Individuals who itemize their deductions may now elect to deduct state and local sales taxes instead of state and local income taxes. This is a tax break aimed at taxpayers living in states without income taxes (such as Texas, Nevada, Washington, Florida). I doubt that California itemizers will benefit from this change.

Charitable Deductions Congress clamped down on "mini-industry" involving donations of junker cars to charity. A charitable deduction for automobiles, airplanes and boats is no longer valued at "Blue Book." Instead, the deduction is limited to the actual sales proceeds received by the charity. This change should substantially reduce the deduction's value. Additionally, taxpayers must report the amount sold or lose the deduction.

Real Estate Investors Real estate investors who receive property through a like-kind IRC Section 1031 exchange and then move into the property as their residence must wait at least 5 years before selling the property and applying the residence exclusion rules.

This provision closes down a perceived loophole which permitted investors to exchange into investment property (ususaly a single-family dwelling), then convert the investment property into their personal residence and use the residency exclusion.

Note: The residence exclusion permits a taxpayer to exclude up to $250,000 of gain ($500,000 for joint filers), provided they owned and lived in the residence at least 24 of the 60 months prior to sale.

Private Bill Collectors Finally, IRS may hire private agencies to collect delinquent taxes. Evidently, IRS decided to "outsource" its debt-collection responsibilities to your friendly bill collector. Expect a lot of controversy over this provision.

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All contents copyright © 1995-2003 Robert L. Sommers, attorney-at-law. All rights reserved. This internet site provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet® is a registered trademark of Robert L. Sommers.