State and Local Reporter - 08/05/2003 (Plain Text Version)

Debora Trimpe, Chair
Flower Mound, Texas

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In this issue:
Brookings' Report on Impact Fees Is Flawed, Says NAHB
Texas Adopts Major Building Industry Reform Package
Big Picture Look at State, Local Governments' Fiscal Crises
Notice and Opportunity to Repair Legislation Recap
New IRS Web Site for Sec. 527 Groups
Legal News: Two Precedent-Setting Cases Could Reach Supreme Court
Get State, Federal Legislative Information on Enhanced NAHB Web Site
NAHB-Supported Federal Tax Bill a Plus for Builders and Small Businesses
SLGA Conference Helps Alaska Association Advance NOR Bill
Industry News
Tools Available to Promote Positive Industry Image

NAHB-Supported Federal Tax Bill a Plus for Builders and Small Businesses

Provisions of the economic growth package that NAHB helped shepherd through the Congress this spring and that President Bush signed into law on May 28 should soon start to produce some good news for consumers and home builders and other small businesses.

Thanks to the ongoing involvement of NAHB, the new law also preserves the value of the Low-Income Housing Tax Credit.

Citing the “vital role” that the nation’s home builders played in working with the Bush Administration to enact the landmark tax-cutting legislation, NAHB President Kent Conine said that the new law represents “a great victory for the housing industry.”

“It will help home building businesses to save money and grow,” Conine said.

Effective this year, small businesses can immediately and fully deduct as much as $100,000 they spend on equipment they put into service. This represents a four-fold increase over the $25,000 allowed previously.

For example, a builder who purchases two $30,000 heavy-duty trucks for his business can write off the cost and still have $40,000 left over for other depreciable expenses.

The only caveat to the law is that the vehicles must weigh at least 6,000 pounds.

The new law also redefines small businesses as those making no more than $400,000 in capital purchases annually, up from $200,000.

Conine provided examples of how the new tax provisions will encourage small builders to invest in new equipment, making their businesses more productive and profitable in the process:

A sole-proprietor home building company has a taxable income of $150,000 and buys a new piece of equipment for $50,000. The new provisions for deducting the cost of that purchase reduce the company’s taxes from $37,200 to $28,000 — a savings of $9,200.
A similar company with income of $250,000 buying a $50,000 piece of equipment reduces its taxes from $79,200 to $66,000 — a $13,200 savings.
A home builder with $400,000 in income that buys a $100,000 piece of equipment slashes taxes from $142,560 to $105,000 — a savings of $37,560.

The White House estimates that 23 million small businesses, which as subchapter S, sole proprietorships or limited partnerships pay taxes at the individual rate, will receive an average tax cut of $2,209 this year.

The new law also encourages investment by reducing income from capital gains and dividends to a maximum 15% tax rate. Both are now being taxed at the same level for the first time since 1990. The top tax rate on dividends was 38.6% under prior law.

For those in the lowest two income tax brackets, the dividend and capital gains tax rates have been reduced to 5%, and they fall to 0% in 2008.

Builders need to be aware of two important provisions in order to gain the maximum advantage for their businesses under the new law, Conine said.

First, the various tax provisions are scheduled to sunset at different times in upcoming years. This was done in order to hold the overall cost of the tax package to $350 billion.

Second, because of the law’s significant cuts in dividend taxes, it may now be advantageous for builders to receive more income from dividends and less from salaries. This might be accomplished by changing the tax structure of a building company and any of the financing syndications with which it is involved.

In any event, in order to devise the best financial strategy to maximize tax benefits, builders are advised to consult with their tax analyst or accountant.