New 2003 Federal Tax Bill Offer Better Benefits for Businesses

Beth L. Fowler
Counsel, Tax Department
January 1, 2003

The new 2003 federal tax bill will reduce your personal taxes, as well as offer added benefits for businesses. It provides two methods for taking greater deductions of costs to purchase business property and also affords additional time to pay some third-quarter 2003 estimated tax payments. The downside is that the new bill will likely make state tax return preparation more difficult.

In 2002, a law was passed allowing a business a deduction of up to thirty percent of the cost of certain property. The deduction could be taken in the year the property was acquired. Prior to this, a business was required to deduct the costs of property over a pre-set number of years. Several types of property qualified for the new deduction, the most common being property with a pre-set period of less than twenty years and certain computer software. The new deduction only applied to property acquired during a limited period of time. This new deduction is known as bonus depreciation.

The new tax bill increases the bonus depreciation to fifty percent of the cost of qualified property. It also includes a separate deduction of part of the cost to buy certain automobiles. The auto deduction is the smallest of $10,710 or the purchase price of the vehicle. These deductions only apply to property acquired after May 5, 2003 and before January 1, 2005. The property must start being used by January 1, 2005. If a contract to purchase property was signed before May 6, 2003, the property will not qualify for the bonus deduction.

The new 2003 tax bill includes a second provision that helps businesses. The tax code allows a business to deduct the entire cost of certain property. Under prior law, the maximum deduction allowed was $25,000, but was phased out if a business purchased more than $200,000 of qualified property in a year. This deduction is called a section 179 deduction since it is found in section 179 of the Internal Revenue Code. The new tax bill increases the section 179 deduction limit to $100,000. The phase-out amount has been doubled to $400,000. Both of these limits are subject to annual cost-of-living increases. The increased phase-out amount allows more companies to take this deduction. Large companies, however, will not benefit from the change. Many New Hampshire companies will benefit from the increased section 179 deduction. The new limits apply for the next three years, expiring in 2006. The section 179 deduction has also been expanded to include deductions for computer software. Under prior law, computer software did not qualify for the section 179 deduction.

Clearly, the new tax bill provides federal tax benefits to businesses that purchase tangible property. However, the federal tax benefit may increase the cost to prepare state tax returns. The states have two basic types of tax statutes: (1) Some directly follow the federal tax code and automatically include any federal law changes. (2) Others follow the tax code from a specified year. In those states, federal tax law changes do not affect state taxes unless the state amends its law to include the federal changes.

In states that directly follow the federal tax code, the federal law changes will apply for state tax purposes. In the remaining states, the federal tax law changes will not be effective for state tax purposes. This will result in a business having to calculate its deductions multiple times. The first calculation will be for federal tax purposes. A recalculation will then be needed for each state in which a return is filed if the state does not directly follow the federal tax code. If the states in which a company does business use different versions of the federal code, the business will be required to calculate its allowable tax deductions multiple times.

The deductions included in the new tax bill also affect the value of property on a company’s books. Therefore, companies will have property with different book values for federal tax purposes than for state tax purposes. Most businesses are required to make quarterly estimated tax payments. Many are required to make their third quarterly payment on September 15th. Under the new tax bill, 25 percent of any amount originally due in September will not be due until October 1, 2003, giving these businesses an additional two weeks to calculate how much their taxes are been changed by the new law.

In New Hampshire, business taxes are based on the 2000 version of the federal tax code. Unless the legislature adopts the federal law changes, they will not apply for New Hampshire tax purposes. Since the federal law changes will reduce revenue, the New Hampshire legislature is not likely to adopt them. Therefore, when preparing its New Hampshire tax return, a business will not be allowed to take the enhanced deductions. Thus, many will find that their total taxable income is greater for New Hampshire purposes than it is for federal purposes.