Tax practitioners preparing 2004 client business and self-employed returns are confronted with a bewildering maze of tax law changes, which in some cases can lead to mistakes.Significant changes affecting 2004 returns include multiple changes to depreciation and expensing, with new limits for sport utility vehicles, passenger automobiles, trucks and vans; bonus depreciation for qualified leasehold property; and newly redesigned Schedule K-1s for partnerships and S corporations.
"The American Jobs Creation Act had so many things in it," said Cindy Hockenberry, tax information analyst at the Appleton, Wis.-based National Association of Tax Professionals. "The expensing limit for SUVs is a really big thing," she said. "It dropped from $102,000 to $25,000. Some people think the new limit doesn't apply until 2005, but it applies to any purchases made on or after Oct. 22, 2004. The $102,000 limit still applies for SUVs placed in service before then, so long as they meet the over-50 percent business use test."
"Another category is light trucks and vans that don't exceed 6,000 pounds," she said. "The limits for these vehicles are slightly higher than passenger autos, but not nearly as high as for vehicles that exceed the 6,000 pound threshold."
"The expensing provision does raise a lot of choices," agreed Lynbrook, N.Y.-based CPA Vincent J. O'Brien. "Especially in states like New York, which eliminated the Sec. 179 expensing for SUVs last year, it influences whether to take the deduction on the federal level. New York says that if you take the deduction on the federal level, you get no deduction on the state level for that vehicle. That's caused some re-thinking for practitioners on how to approach the federal deduction."
There is still some tax advantage for vehicle purchases made after the Oct. 22, 2004, cutoff, O'Brien noted. "Even though they are not as advantageous as before, the real harshness of the new rules won't be felt until 2005," he said. "That's because you can still use the 50 percent bonus depreciation on what's left over from expensing. Bonus depreciation expired at the end of 2004."
"A minivan or SUV or truck that's under 6,000 pounds gets a little higher limit than a sedan, but only about 10 percent higher," he said. "Once they're over 6,000 pounds, things open up quite a bit."
"There's also a rule that if you have a van and you paint the company logo on it and rip out the passenger seats and use it for carrying equipment or making deliveries - even if it weighs less than 6,000 pounds - it won't be considered a passenger vehicle, and you are exempt from the annual ceilings," he added.
"For most taxpayers, the SUV is still the better deduction, tax-wise, regardless of when it was placed in service," O'Brien noted. "Our clients are asking a lot of questions about this. It adds a lot of spice to tax season - we're getting to spend a lot more time talking about cars than we otherwise would."
Changes affecting leasehold improvements are also a complicating factor for practitioners, according to participants at a recent IRS-sponsored conference of Tax Talk Today.
"We have, prior to this bill, been placed in the shoes of the owner of the property," said Frances Coet, CPA, a principal with Denver-based Coet & Coet.
"So, if it's 39-year commercial property, then the leasehold improvements on a five-year lease still had to be written off for a 39-year period," she said. "What the new bill does for qualifying leasehold improvements is shorten that to a 15-year life. This provides another boon to the economy for people to make investments."
To complicate matters, the provision applies only to property placed in service after Oct. 22, 2004, she noted. In addition, between that date and the end of the year, bonus depreciation applies as well.
For the first time in 20 years, the Schedule K-1 has been completely redesigned, according to Curt Freeman, of the IRS Tax Forms and Publications Division.
"The K-1s are redesigned to look more like a Form 1099," he said. "It's broken into three parts. The first part is information about the partnership, the second one identifies the information about the partner, and then the third one has many more entry spaces than we were able to fit on the previous revision of the form, so that for almost every partner in almost every partnership we're going to be able to fit almost all the items on the front of the K-1, rather than having to explain them in attachments."
Additional format changes made to the K-1 include the position of check boxes to indicate whether it is an amended K-1 or a final K-1, according to Freeman.
"Those have moved to the top, so that IRS personnel that are processing them, and the taxpayers and practitioners, will be able to see them," he said. On the final K-1s, he noted, "if that box isn't picked up in processing, we may still be looking for returns next year from that same K-1. So having those at the top should make those much easier for people to see, and reduce some errors."
A typical mistake made by tax professionals who file business returns is getting the taxpayer identification number incorrect, according to Larry Faulkner, with the IRS Submission Processing for Business Returns.
"It continues to be almost the most important feature to get a tax return processed by IRS," he said. "Also, make sure that you use the name of the business that's used in the SS-4 to get your [employer identification number]."
"Use the legal name of the business, not the 'doing business as' name. When we match up the EIN and the business name in our records with what's on the tax return, they have to be a match or the return will be rejected."
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