Whether you are talking Rome in the time of Caesar - London in the time of Dickens or Washington in the time of President Bush, taxes are always a subject of discussion and often derision.
Taxes are the chief business of a conqueror of the world.
-George Bernard Shaw (Caesar, in Caesar and Cleopatra)
It was as true as taxes is. And nothing's truer than them.
-Charles Dickens (Mr. Barkis in David Copperfield)
Because America needs more than a temporary expansion, we need more than temporary tax relief. I urge Congress to act responsibly and make the tax cuts permanent.
-President Bush (State of the Union Address 2006)
No one wants to pay taxes. Unfortunately when trying to reform the tax system, there are winners and losers. What one person sees as a loophole to be closed, another sees as a legitimate business deduction critical to the survival of an industry. Last year, we discussed the President's proposal to reform the tax code. He established a panel that traveled the country; held hearings; and came up with a number of recommendations to totally revise the way we pay taxes. That is as far as the recommendations have gone. With 2006 an election year and the lack of a strong push for reform, it is unlikely to go any further this year.
President Bush has had major tax bills enacted every year he has been in office and 2005 was no exception. In fact, several bills were passed after Hurricane Katrina. While most of these changes impact taxpayers in the Gulf region, others are across-the-board. Portions of Alabama, Florida, Louisiana, Mississippi and Texas were declared Presidential disaster areas as a result of one of the hurricanes to hit the region at the end of the season.
One of the provisions provided a temporary suspension of limits on charitable contributions for both individuals and business for contributions made to qualified charitable organizations for hurricane relief efforts made after August 27, 2005 and before January 1, 2006. For corporations, the limitation is 100 percent of taxable income rather than the normal ten percent. Any contribution in excess of this amount can be carried over to subsequent years.
Changes were also made to the casualty loss and net operating loss rules for businesses in the Gulf Opportunity (GO) Zone. Special depreciation rules apply too for qualified GO Zone properties placed in service after August 27. There is an additional allowance of 50 percent of the properties depreciable basis for the first year the property is placed in service. Among the exclusions from qualified property are commercial golf courses, country clubs and gambling casinos. Not excluded are hotels even if associated with these disqualified properties.
In addition, a Hurricane Katrina employee is now a "targeted group" employee for work opportunity credit purposes and an employee retention credit was provided for any qualified employer in the GO Zone. The lodging industry, and hospitality as a whole, is such a large part of the economy of the region impacted by the hurricanes that it is essential you review the benefits available and take advantage of them.
The lodging industry, while being very heavily service oriented, has a large capital component as well. As a result, it has taken advantage of all the tax incentives regularly passed by Congress to encourage investment. Businesses may expense up to $108,000 in purchases of capital assets during 2006 (Section 179 deduction). This is an increase from the $105,000 limit in 2005. The benefit of this expensing begins to phase out once $430,000 in assets is placed in service.
The larger amount of expensing was supposed to be a temporary measure expiring in 2005. It was extended for two more years. Unfortunately, the provision providing additional first year bonus depreciation was not extended and no longer applies after 2004. With all of this emphasis on capital assets, the industry has been a great user of cost segregation studies to ensure that assets are properly classified to obtain the greatest depreciation deduction available. The IRS has indicated that they will look at these studies to make sure they are supported by sufficient data.
While tax reform may not go very far this year, it is not to say that there will not be any emphasis on tax. At press time, Congress was working on reconciliation bills to extend provisions that either expired at the end of 2005 or will expire in a few years. Among these are extensions of alternative minimum tax (AMT) relief and the research and development tax credit. The President, in the State of the Union address asked for Congressional action on the permanent extension of tax cuts, new tax breaks for health savings accounts and to make the research and development credit permanent.
While some of the proposals are not controversial, others will be very difficult to pass and will be the subject of extensive debate during the run-up to the fall elections. Stay tuned!
Kevin F. Reilly, an attorney and CPA, is a member of the firm, PKF Witt Mares, where he serves as the leader of the hospitality niche. Known for its specialization in serving the hospitality industry, PKF Witt Mares publishes Clubs In Town & Country, an annual compilation of club operating data, and Federal Taxes and The Private Club, an annual review of topics of interest to private clubs.