The
Jobs and Growth Tax Relief Reconciliation Act of 2003 was passed
by the House of Representatives and the Senate on May 23, 2003 and
signed by the President on May 28.
Like
the Economic Growth and Tax Relief Reconciliation Act of 2001
and the Job Creation and Worker
Assistance Act of 2002 , the 2003 Act is intended to help stimulate
the U.S. economy. Because the revised individual income tax rates
are reduced and accelerated, the new tax law is a potentially
big
tax saver for smaller businesses operating as S corporations.
Consider
the following: The principle feature for the 2003 Act is
the fact that the individual income tax rates are now lower than
ever. The 10 percent and 15 percent tax rates remain the same, but
the four higher brackets are cut as follows:
Previous
rate
Drops
to
27%
25%
30%
28%
35%
33%
38.6%
35%
Since the net
income from an S corporation flows-through to the tax returns of
the individual shareholders, the new lower tax rates will translate
into lower personal income taxes on company profits. This is good
for news for millions of smaller business owners.
But
that's not all..
Cutting the Self-Employment Tax
An S corporation
has always been a good vehicle to use to save on the self-employment
tax. In fact, the S corporation remains one of the few four-leaf
clovers still left in the U.S. Tax code. That's because net income
from an S corporation is NOT subject to the self-employment tax.
Small
businesses and self-employed individuals who file their taxes
using Schedule C know quite well how much the self-employment
tax
can cost.
A
small business can literally save thousands a year by incorporating
and electing subchapter S status.
In
addition, since net income is NOT subject to the self-employment
tax, a small businessperson can pay themselves a salary and
take
additional monies out without paying a tax on dividends. (Restrictions
apply, of course, so please see a tax professional for your
own situation).
If
structured and implemented properly, a Subchapter S corporation
could save you thousands of tax dollars per year. Instead of operating
as a sole proprietor, partnership or LLC, you incorporate and elect
Subchapter S status with the IRS. (If your state has a high corporate
income tax rate, then it would make sense to elect S status with
your state as well).
As an employee-shareholder
of your S corporation, you pay yourself wages just like you would
any other employee. But instead of taking all the profits out through
payroll, you take cash distributions called nontaxable dividends.
Nontaxable
dividends are called nontaxable, because they aren’t
double taxed like the dividends paid to shareholders in a regular
C corporation (although beginning in 2003, C corporation dividends
aren’t taxed either).
You’re still paying taxes on
the net income of your S corporation when you file your personal
tax
return, but the tax is federal tax and not the self-employment
tax. S corporation net income is not subject to the self-employment
tax.
Items
of Note:
Salary
must be reasonable. You must be diligent when paying
yourself a salary as an employee shareholder of an S corporation.
The salary must be legitimate and sensible in relation to company
profits. In other words, you can’t give yourself an artificially
low salary of say $5,000 and then take nontaxable dividends of
$50,000.
FICA
limits: The money you’ll save is reduced once your
wages are over the FICA threshold amount (which is currently $87,000
for 2003. Keep in mind that the threshold amount changes each
year). If your wages are over the FICA threshold amount, you’ve
already paid the maximum “old-age, survivors and disability” portion
of the tax. Your only savings of self-employment taxes beyond
that point will be on the 2.9% Medicare tax.
Increased
Depreciation Deductions
Another key
feature of the Jobs and Growth Tax Relief Reconciliation Act of
2003 is the increase in the small business expense allowance for
qualifying depreciable property. Here are the details:
Section
179 Deductions
The best part is a huge increase in the Section 179 first year
depreciation allowance. The new law quadrupled the allowance—allowing
companies to write off up to 100% of the cost of most new and used
business
assets (other than real estate) in the year it is put into service.
Previously, the maximum expense in one year was $25,000. Companies
may now write off as much as $100,000 per year in purchases, thus
lowering their taxable income by the same amount. And it does not
matter whether the company paid cash for the business assets or
borrowed to purchase them.
50%
Bonus Write Off for New Equipment
The new law also created an accelerated depreciation schedule for
some types of property that normally would be written off using
standard depreciation tables. For property purchased after May
5,
2003, businesses can choose to claim 50% "bonus" depreciation,
which is added on to the normal depreciation write-off for that
particular property. For example, if the property normally would
be written off over a five year period, the taxpayer could write
off 60% of it in the first year - the 50% bonus, plus 20% of the
remaining amount.
These changes
are a potential huge tax savings, especially for
businesses contemplating purchasing new equipment, machinery or
other depreciable assets.
Because of these
and other favorable tax rules, the S corporation remains a potent
tax savings vehicle. The Jobs and Growth Tax Relief Reconciliation
Act of 2003 only made a good thing better. Talk to your CPA or other
tax advisor to see if you too can take advantage of the benefits
of using an S corp.
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If
you'd like more information or would like to discuss this
article personally with me, please write to
me at alex@goldminetactics.com
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below for author information.
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