Now that the 2000 tax year has ended for most limousine businesses, there are not many moves that the average operator can make, nor many new tax rules that the operator can take advantage of that will help reduce their tax bill. Rather, all that is left at this time is to make the most of the existing tax rules — all the while keeping an eye on the limousine operation’s potential tax bill for 2001.
That means not only making the most of your existing tax deductions, but doing so in a manner that won’t adversely affect or reduce next year’s tax deductions. Unless, of course, the limousine operation’s income can be expected to be substantially lower this year. Tax deductions, wherever possible, should be used to offset income in the highest possible tax bracket.
Changes, but not in the Tax Law
Surprisingly, the IRS has publicly announced several efforts that, on the surface, appear to run contrary to laws passed by Congress. For example, late in 1999 Congress passed a simple law change that denied the use of installment sales to businesses that used the accrual method of accounting. Suddenly, every operator who had planned to use installment sales to reduce the tax bill resulting from the sale of their business was out in the cold — if the business was one of millions that was required to use the accrual method of accounting.
The IRS responded to this law change by issuing regulations that exempted every business with revenues averaging under $1 million from having to use accrual accounting — regardless of whether they were required to use inventories or not. Of course, this blanket exemption left unanswered the question of whether limousine operations with average revenues between $1 million and $5 million could use the far easier cash method of accounting under the existing tax law’s “safe harbor.”
Now, Congress has passed legislation repealing that law that denied the use of installment sales to businesses on the accrual method of accounting. This bill has been signed into law. Fortunately, the existing IRS loopholes will remain and, hopefully, help many limousine operators — particularly those grossing less than $1 million annually.
A limousine operator — whether doing business as a corporation, an individual or a partnership — is permitted to deduct (from gross income), all of the ordinary and necessary expenses of carrying on that trade or business that are paid or incurred in the tax year. However, no tax deduction is permitted for any expenditure that is a capital expense. Any expense that adds to the value or useful life of property is considered to be a capital expense. Generally, those capital expenses must be deducted by means of depreciation, amortization or depletion.
Depreciation is defined as a deduction allowed to a taxpayer, representing a reasonable allowance for the exhaustion of property used in a trade or business or property held for the production of income. Amortization is the systematic write-off of costs incurred to acquire an intangible asset, such as a patent, copyright, goodwill or expense. Depletion is best described as a process whereby the cost or other basis of a natural resource (such as a coal interest) is recovered upon the extraction and sale of the deposit.
Current deductions that are permissible despite the restrictions of our tax laws include barrier removal. Business taxpayers can elect to deduct up to $15,000 of the costs of removing certain architectural and transportation barriers for handicapped or elderly persons in the year paid or incurred, instead of capitalizing and depreciating such costs.
And, don’t forget, up to $20,000 of qualified equipment acquisitions may be written-off as a so-called “Section 179” expense. Expenses that kept your limousines and other business property in ordinarily efficient operating condition and did not add to its value or appreciably prolong its useful life are generally deductible as repairs on the 2000 tax return. Repairs are the routine costs for repairing the limousine or fleet. When it comes to the building housing the limousine operation, repairs include repainting, tuck-pointing, mending leaks, plastering and conditioning gutters on buildings. However, the costs of installing a new roof and bricking up windows to strengthen a wall are capital expenditures.
Don’t Overlook the Changing Basic Deductions That deduction for the health insurance expenses of self-employed limousine operators, for example, has increased incrementally from 1998’s 40-percent level to 60 percent in both 1999 and 2000. Self-employed operators can deduct 60 percent of amounts paid in 2000 for health insurance for themselves, spouses and dependents from their gross income. The self-employed health insurance deduction remains at 60 percent through 2001 and then increases to 70 percent in 2002 and 100 percent in 2003 and beyond — all without action by our lawmakers. Those operators who utilize a home office should not neglect the broadened availability of the home office tax deduction, thanks to a ruling by the U.S. Supreme Court a couple of years ago. That deduction is now available in situations where a home office is used for administrative and management functions.
On the other side of the coin, or in this case, the home office expense deduction, laws passed two years ago may have an adverse impact on the decision by many operators to take advantage of this write-off. The tax law change merely took away the age restriction that exempted up to $250,000 of the gains resulting from the sale of a principal residence from being taxed. This is a windfall to many successful operators who plan to sell their homes and move to a larger one somewhere down the road. Unfortunately, claiming a portion of the home as a home office may prevent that home from qualifying as a “residence” and benefiting from the exclusion.
Family-owned limousine businesses are now entitled to a unique exclusion from estate and gift taxes that rewards those operators who choose to ignore the thorny question of business succession. That exclusion is generally equal to the difference between $1.3 million and the standard estate tax exclusion for the year in question. Although it is the estate of a deceased operator that benefits, thanks to this exclusion and the standard exemption, a qualified family business interest with a value of up to $1.3 million can pass, untouched by estate taxes, to the operator’s heirs.
Low-Tax Profits = Capital Gains
Generally, for sales of long-term capital assets, capital gains rates of 20 percent or 10 percent will apply after December 31, 2000 — provided, of course, that the regular long-term holding period has been met (i.e., more than 12 months). However, a lower capital gains rate of 18 percent (eight percent for individuals in the 15 percent tax bracket) may be applied if the individual held the asset more than five years.
As a general rule, an individual in a marginal tax bracket higher than 15 percent must....
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