LOISELLE, GOODWIN & HINDS
CERTIFIED PUBLIC ACCOUNTANTS

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Details on Business-Related Tax Relief in the 2004 Working Families Act

The recently passed 2004 Working Families Act extended the life of more than 20 expired or expiring business-related tax provisions. The Act provides for a straight extension of the existing tax provisions, in most cases through Dec. 31, 2005. Here are details regarding these important extensions.

Research credit.

Under pre-Act law, the research credit terminated for amounts paid or incurred after June 30, 2004. Under the Act, the credit is extended for amounts paid or incurred after June 30, 2004 and before 2006.

Work opportunity tax credit.

Under pre-Act law, this credit did not apply for wages paid or incurred to a qualified individual who began work after 2003. Under the Act, the credit is extended for wages paid or incurred for individuals beginning work after 2003 and before 2006.

Welfare-to-work credit.

Under pre-Act law, this credit did not apply for wages paid or incurred to a qualified individual who began work after 2003. Under the Act, the credit is extended for wages paid or incurred for individuals beginning work after 2003 and before 2006.

Enhanced deduction for a corporation's qualified computer deductions.

Under pre-Act law, the enhanced deduction was not available for contributions made in tax years beginning after 2003. Under the Act, the enhanced deduction for qualified computer contributions is extended for contributions made in tax years beginning after 2003 and before 2006.

Expensing of environmental remediation costs.

Under pre-Act law, the elective expensing option was not available for expenses paid or incurred after 2003. Under the Act, the election to treat qualified environmental remediation expenses is extended for expenses paid or incurred after 2003 and before 2006.

Credit for producing electricity from certain renewable resources.

Under pre-Act law, the credit was not available for facilities placed in service after 2003. Under the Act, the renewable electricity production credit is extended, effective for facilities placed in service after 2003 and before 2006.

Suspension of the net-income limitation on percentage depletion for marginal wells.

Under pre-Act law, the 100%-of-taxable-income limit didn't apply to so much of the depletion allowance as is determined under the rules relating to oil and gas produced from marginal properties for any tax year beginning before 2004. Under the Act, the suspension of the 100%-of-net-income limit for marginal wells is extended for tax years beginning after 2003 and before 2006.

Credit for qualified electric vehicles.

Under pre- Act law, the otherwise allowable credit was reduced by 25% (25% phasedown) for property placed in service in 2004, 50% (50% phasedown), if placed in service in 2005, and 75% (75% phasedown), if placed in service in 2006. The credit doesn't apply for vehicles placed in service after 2006. Under the Act, the otherwise allowable credit for a qualified electric vehicle is available in full for vehicles purchased in 2004 and 2005. In other words, the Act repeals the 25% phasedown of the credit for 2004 and the 50% phasedown for 2005.

Deduction for qualified clean fuel property.

Under pre-Act law, the deduction limits were reduced by 25% (25% phasedown), for property placed in service in 2004, 50% (50% phasedown), if placed in service in 2005, 75% (75% phasedown), if placed in service in 2006, and 100%, if placed in service after 2006. Under the Act, the otherwise allowable deduction for qualified clean fuel property is available in full for 2004 and 2005. In other words, the Act repeals the 25% phasedown of the deduction for 2004 and the 50% phasedown for 2005.

Indian employment tax credit.

Under pre-Act law, the employer's wage credit for employment of certain Native Americans would have expired on Dec. 31, 2004. The Act extends the wage credit through tax years beginning before Jan. 1, 2006.

Accelerated depreciation for business property on Indian reservations.

Under pre-Act law, special depreciation recovery periods apply to qualified Indian reservation property placed in service after Dec. 31,1993 and before Jan. 1, 2005. The Act extends the eligibility for the special depreciation periods to property placed in service before Jan.1, 2006.

District of Columbia Enterprise Zone; first-time D.C. homebuyer credit.

Under pre-Act law, the District of Columbia Enterprise Zone designation expired on Dec. 31, 2003. Also, the credit for first-time homebuyers of a principal residence in D.C. expired for property purchased after Dec. 31, 2003. The Act provides a two-year extension of (1) the D.C. Zone designation and related tax incentives; and (2) the first-time D.C. homebuyer credit.

Qualified Zone Academy Bonds (QZABs).

Under pre-Act law, a total of $400 million of QZABs were only authorized to be issued annually through 2003. The Act authorizes $400 million of QZABs to be issued annually in 2004 and 2005.

New York Liberty Zone Bonds.

Under pre-Act law, an aggregate of $8 billion in tax-exempt private activity bonds was authorized for the purpose of financing the construction and repair of infrastructure in New York City and had to be issued before Jan.1, 2005. The Act extends the authority to issue Liberty Zone bonds through Dec. 31, 2009.

Parity in application of certain limits to mental health benefits.

The Act extends through Dec. 31, 2005 the rules prohibiting group health plans providing both medical and surgical benefits and mental health benefits from imposing aggregate lifetime or annual dollar limits on mental health benefits that are not also imposed on substantially all medical and surgical benefits.

Archer medical savings accounts (MSAs).

Under pre-Act law, no new contributions could be made to Archer MSAs after 2003, except by or on behalf of individuals who previously had Archer MSA contributions, and employees who are employed by a participating employer. The Act extends Archer MSAs through 2005.

Nonrefundable personal credits allowed against regular and AMT tax liability.

Under pre-Act law, for tax years beginning after 2003, the combined total of nonrefundable personal credits (other than the adoption credit, the child credit, and the credit for elective deferrals and IRA contributions (the saver's credit)) could not be used as an offset against alternative minimum tax (AMT). Under the Act, for tax years beginning in 2004 and 2005, all of the otherwise allowable nonrefundable personal credits (not just the adoption credit, child tax credit and saver's credit) may reduce AMT.

Foreign tax credit.

The total amount of the foreign tax credit a taxpayer may claim is limited based in part on the taxpayer's U.S. tax liability. For tax years beginning in 2003, an individual's U.S. tax for this purpose was determined without regard to nonrefundable personal credits. The Act adds tax years beginning in 2004 and 2005 to those years in which an individual's U.S tax liability isn't reduced by nonrefundable personal credits, for purposes of computing the foreign tax credit.

Above-the-line educators' deduction.

Under pre-Act law, the deduction was not available for tax years beginning after 2003. Under the Act, the above-the-line deduction for qualifying expenses of eligible educators is extended for tax years beginning during 2004 or 2005.

(10/12/04)

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Last modified: August 11, 2005