Businesses need to track tax-code changes for 2004

While most businesses rely on a tax specialist to stay abreast of tax changes, keeping up with the ever-evolving rules is also an important part of business planning and management.

The following is an overview of important changes for 2004.

Expense limit for SUVs. For sport utility vehicles placed in service after Oct. 22, 2004, a business cannot take a first-year deduction of more than $25,000. The remaining cost is depreciated. (The limit previously was $100,000).

The new limit does not affect other types of property where the business decides to expense the cost instead of depreciating the property.

Educator’s deduction. Teachers and other educators should save their receipts for books and other classroom supplies since recently enacted legislation will allow them to deduct up to $250 of these expenses.

The Working Families Tax Relief Act of 2004 reinstated the educator expense deduction for 2004 and 2005. Expenses incurred anytime in 2004 or 2005 qualify for the deduction.

Educators in public or private elementary or secondary schools who work at least 900 hours during a school year as a teacher, instructor, counselor, principal or aide may use the deduction.

An educator may deduct up to $250 of qualified out-of-pocket expenses when figuring adjusted gross income. The deduction is also available to those who do not itemize.

Self-employment tax. The self-employment tax rate on net earnings is the same for 2004. The rate (15.3 percent) combines 12.4 percent for Social Security (old-age, survivors, and disability insurance) and 2.9 percent for Medicare (hospital insurance).

The maximum amount subject to the Social Security portion has increased to $87,900 for tax years beginning in 2004.

All net earnings of $400 or more are subject to the Medicare portion.

Social Security and Medicare taxes. The maximum amount of 2004 wages subject to the tax has increased to $87,900. For Medicare tax, all covered 2004 wages are subject to tax. For 2004, employers and employees will continue to pay 6.2 percent each for social security tax and 1.45 percent each for Medicare.

Standard mileage rate. The standard mileage rate for the cost of operating a car, van, pickup or panel truck has increased to 37.5 cents a mile for business miles.

Beginning in 2004 the business standard mileage rate can be used for as many as four vehicles that your company owns or leases and uses simultaneously.

Individual retirement accounts. For employees covered by a retirement plan at work, the deduction for contributions to a traditional IRA will be reduced if modified adjusted gross income is:

– More than $65,000 but less than $75,000 for a married couple filing a joint return or a qualifying widow(er)

– More than $45,000 but less than $55,000 for a single individual or head of household

– Less than $10,000 for a married individual filing a separate return

For all filing statuses other than married filing separately, the upper and lower limits of the phase-out range will increase by $5,000.

403(b) plan changes. For 2004 the limit on elective deferrals has increased from $12,000 to $13,000. The limit on elective deferrals will increase by $1,000 each year through 2006. The limit on annual additions has increased to the lesser of $41,000 or your includable compensation for your most recent year of service.

If you are age 50 or older by the end of 2004, you may be permitted to make additional catch-up contributions up to $3,000 to your 403(b) or Thrift Savings Plan.

n Qualified plans. For years after 2003, the maximum annual benefit for a participant in a defined benefit plan increases to the lesser of the following amounts:

– 100 percent of the participant’s average compensation for his or her highest three consecutive calendar years.

– $165,000 (subject to cost-of-living increases after 2004).

For years beginning after 2003, a defined contribution plan’s maximum annual contributions and other additions-excluding earnings-to the account of a participant increases to the lesser of the following amounts:

– 100 percent of the compensation actually paid to the participant.

– $41,000 (subject to cost-of-living increases after 2004).

Simplified employee pensions (SEPs). The maximum deduction for contributions to a SEP is 25 percent of the compensation paid or accrued during the year to your eligible employees participating in the plan.

For years beginning after 2003, the maximum combined deduction for a participant’s elective deferrals and other SEP contributions increases to $41,000.

For years beginning after 2003, the annual limit on the amount of employer contributions to a SEP increases to the lesser of the following amounts:

– 25 percent of an eligible employee’s compensation;

– $41,000 (subject to cost of living adjustments after 2004).

For years after 2003, the maximum amount of an employee’s compensation you can consider when figuring SEP contributions (including elective deferrals) and the deduction for contributions increases to $205,000.

Copyright (c) 2005 Publishers-Edge

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