MEMORANDUM

 

 

TO:

 

Corporate Attorneys

FROM:

Thomas J. Mahoney, Jr.

 

DATE:

May 28, 2003

 

RE:

Federal Tax Law Changes

 

 

 

The President signed into law today the "Jobs and Growth Tax Relief Reconciliation Act of 2003" (the "Act") which reduces tax rates and provides other incentives for business investment. Of particular importance to our clients are the following provisions:

1. Reduction of Personal Income Tax Rates. The Act accelerates the previously passed reductions in marginal tax rates that were scheduled to phase-in over the next three years. For 2003, tax rate brackets under prior law and the Act are as follows:

Prior Law

The Act

27%

25%

30%

28%

35%

33%

38.6%

35%

 

Since many of our clients' businesses are S corporations or partnerships for tax purposes, the individual rates are effectively the tax rates for the business.

 

2. Increased Incentives for Business Investment.

a. Bonus Depreciation. Under existing law, businesses placing new equipment in service before January 1, 2005 could take "bonus" depreciation of thirty percent (30%) of the cost of the equipment in the first year of service. The Act increases the bonus depreciation to 50% of cost for equipment purchased and placed in service after May 5, 2003 and before January 1, 2005.

b. Expensing of Depreciable Business Assets. Presently a business can elect to expense (rather than depreciate over time) up to $25,000 in business assets acquired in a tax year. This benefit is phased out dollar for dollar for businesses with purchases of over $200,000. The Act increases the amount that can be expensed to $100,000 and increases the limit to begin the phase-out to $400,000.

3. Reduction of Capital Gain and Dividend Tax Rates. Presently, capital gains are taxed at a maximum rate of twenty percent (20%) and dividends received by individuals are taxed at the individual's marginal tax rate. The Act reduces the maximum capital gains tax rate to fifteen percent (15%) and taxes most dividends received by individuals at the same rate as net capital gains, again with a maximum tax rate of fifteen percent (15%).