Tax Update: Tax Cuts for Individuals and Businesses

In October 2004, two tax bills were signed that provide tax cuts to both individuals and businesses.  Certain changes are effective retroactively, some take effect as of the signing of the law, and some will be effective at a future date.  These are the terms of The American Jobs Creation Act of 2004:

For 2005 and 2006, domestic manufacturers are allowed a deduction from gross profit of 3% of the lesser of the qualified production activities or taxable income for the year.

1. Construction and engineering are defined as “manufacturing.”
2. The deduction is limited to 50% of wages paid during the tax year.
3. The deduction applies to C-Corps., S-Corps., LLCs and Partnerships.

For 2004 and 2005, taxpayers who itemize can elect to deduct either their state and local income taxes for the year or their state and local sales taxes paid during the year.

1. Individuals living in states without an income tax, including Tennessee, Texas, and Florida, receive a major benefit.
2. To calculate the deduction, individuals can either:
1. Use actual sales tax paid based on receipts from the tax year, or
2. Calculate the deduction using the IRS formula.
3. The taxpayer can add the sales tax paid on the purchase of automobiles and boats to the deduction calculated by the IRS formula.