12-10-04
BY GREG MERMEL, C.P.A.
As the year’s end approaches, and with it the annual task of tax return filing, a look at new and changed tax provisions is in order.
Certain changes routinely and boringly happen every year. Inflation adjustments are automatically applied to the standard deduction, the personal exemption amount, the income levels dividing various income tax rates and figures in a variety of phase-out tables. You need not memorize them. (I don’t.) Just be sure to look them up instead of copying last year’s figures.
The mileage rate for business automobile use is a not-quite-automatic adjustment each year. For 2004, it is 37.5 cents per mile (compared with 36 cents for 2003), but for 2005 it takes a record leap to 40.5 cents per mile. The Internal Revenue Service press release attributes the big jump to “higher prices for vehicles and fuel.” Oil at $50 a barrel and devaluing the U.S. dollar will do that.
Not So Routine
The president and Congress, always eager to show their concern for taxpayers in the months before an election, brought forth two new laws this fall: the Working Families Tax Relief Act and the American Jobs Creation Act. Neither title has much to do with the laws’ contents. The Working Families Act is primarily about extending tax provisions that were scheduled to expire. Not that anybody ever thought they would. In theory, Congress has set rules for itself saying any tax break given must be balanced by an equal revenue measure. Making a tax change “temporary” means they need only cover the revenue gap for a year or two, which can often be done with short-term gimmicks rather than any actual tax increase. Nobody can then be attacked by a Karl Rove or Tom DeLay as a “tax and spend” advocate.
A Bare Framework Covered with Shiny Baubles
The ostensible reason for rushing the American Jobs Creation Act through was to repeal certain special tax provisions involving foreign income. These rules gave special tax treatment to exporters and provided some luscious tax loopholes for multinational businesses. The World Trade Organization had ruled that the export provisions were illegal subsidies and therefore violated numerous treaties. The Act replaces those export rules and multinational loopholes with new ones, which may also eventually be judged illegal. But that will take years.
This sort of “must-pass” bill in an election year quickly becomes what is known on Capitol Hill as a Christmas Tree, laden with special-interest provisions. The excise tax break for American manufacturers of fishing tackle boxes has been well publicized, probably because the largest such company is in House Speaker Dennis Hastert’s district. NASCAR racetracks get an accelerated depreciation write off. So do certain leasehold improvements and restaurant property; apparently someone needed a break today. And there are scores of others.
Other provisions of this election-year law have broader applications…
Car Trouble
…two involve automobiles. As I discussed in my May 28 column, some sport-utility vehicles are too massive to count as passenger cars under a 1984 law; this allowed many business purchasers to write them off immediately as if they were heavy machinery. While not quite repealed, the provision has been pruned sufficiently so far as to no longer be an incentive to buy these monstrosities.
A change more likely to affect PerformInk readers and the arts organizations they work for involves donation of used cars. Generally, you can deduct the fair market value of a non-cash asset you contribute to charity. The value of a used car is a matter of estimation and varies widely with condition. Too many people got greedy. The rusted-out beater which wouldn’t start (and which would be unsafe to drive if it did start) was all too often valued—and used as a tax deduction for the donor—as if it were in mint condition.
Charities, on the other hand, rarely keep the cars they are given. Rather, they sell them, often through a private agent who then re-sells the cars at auction. Usually the charities receive far less money for the car than the donor claims on his tax returns. (It’s a bit like the City of Chicago’s now-controversial privatized towing program, with the agents, like the towing companies, making out like bandits.)
Beginning next year, the fair market value deduction applies only if the charity actually uses the vehicle. Otherwise, the charity must disclose to the donor the price for which the car was sold. That price is the amount the donor can deduct. The goal here is to insure that the cars are sold to unrelated parties at a realistic price, so that the charity receives the value of the car and the donor doesn’t deduct more than the car sold for. At best, this will be a fair wholesale price rather than the retail price even honest taxpayers have typically used for their deductions.
You Can’t Keep A Bad Idea Down
Prior to the 1986 Tax Reform Act, sales tax was an itemized deduction along with property taxes and state and local income taxes. Beginning in 2004, this deduction has returned from the grave in slightly altered form. Now it is an either/or deduction: income taxes or sales tax, but not both. It is difficult to see this as anything other than election-year pandering to voters in the eight states which have no state income tax.
The deduction is usually taken from IRS-prepared tables, based on where you live, your income and your household size, with additions allowed only for the tax on automobile or boat purchases. One reason that this deduction was abandoned in 1986 is the complexity that local and regional sales taxes add to the tables. These taxes have proliferated in the past two decades. The 1986 Illinois table had four variations for local tax; there are now at least eight different rates just in metropolitan Chicago.
One can, if sufficiently obsessive, keep track of your actual sales tax expense. This may be worthwhile if you know you are going to have a year with really big purchases. A few years ago I did a gut rehab of the three-flat I own and live in. Plumbing fixtures, light fixtures, furniture, kitchen cabinets, door hardware, floor tile and a motorized dog door all went on the airline-affiliated credit card. I then flew to Australia, business class, and had miles left over. Even spread over two years, the tax on these purchases plus the sales tax in my everyday spending would have been more than my income tax.
If you do keep track of the actual tax, though, remember you cannot double-dip. If you are already deducting the cost as a business expense (such as office supplies or makeup), you cannot count it again in your sales tax deduction.
Are there money or tax questions you would like to see discussed in this column? Let me know, at 2835 N. Sheffield, Suite 311, Chicago, IL 60657, or call 773/525-1778 (888/525-1778 toll-free outside the Chicago area) or e-mail greg@gregmermel.com.
Greg Mermel is a certified public accountant whose clients in the arts range from individual performers to major theatre companies and suppliers. He also has been known to produce theatre.