So much for simplifying the tax code.


Tax laws passed this year add even more complexity to the code than taxpayers had to deal with previously.


Theres another 600 pages added to the tax code, but there are some very good provisions, especially for Washington taxpayers, both on the business side and the individual side, says Kevin Sell, tax director at the Spokane office of Seattle-based Moss Adams LLP.


Chris Hesse, tax director at LeMaster & Daniels PLLC, of Spokane, says the American Jobs Creation Act of 2004, which President Bush signed into law late last month, repeals one provision for manufacturers who sell internationally, but adds another one for all manufacturers. It also expands rules regarding which businesses are eligible to become S-corporations, which could be a blessing for some mid-sized companies.


On the enforcement side, the new law tightens rules regarding deferred compensation to employees, and narrows a loophole involving charitable contributions, while stiffening penalties for using illegal tax shelters.


Meanwhile, the Working Families Tax Relief Act of 2004, signed into law early this fall, basically extends the effective date of a number of tax breaks already in place, Hesse says.


One purpose of the American Jobs Creation Acts provisions regarding manufacturers is to resolve a conflict between the U.S. and the World Trade Organization, Hesse says.


A tax bill passed a few years ago allowed U.S. manufacturers who sent goods abroad to exclude from their taxable income a percentage of their foreign sales.


In 2002, however, the WTO ruled that was an inappropriate subsidy and allowed other countries to assess tariffs to U.S. goods because of it.


In most cases, the tariff was worse than the tax benefit, Hesse says.


The new law repeals whats called the extraterritorial income exclusion so that the WTO will lift the tariffs.


To offset the loss of that exclusion, the law allows a business to deduct from its taxable income in 2005 and 2006 3 percent of its revenue from manufacturing, regardless of where its goods are sold. The deductible amount would ratchet up to 6 percent in 2007 and 2008 and 9 percent in 2009 and beyond, Hesse says.


When fully phased in, the provision effectively will decrease a manufacturers overall tax rate by about 3 percentage points, he says.


Its unclear, however, what constitutes manufacturing activity under the new law, leaving the provision open to wide interpretation and possible abuse, Hesse says.


The IRS is going to have a lot of work drafting regulations, because there is going to be a lot of abuse, Hesse says. I dont see this being in the tax law long.


In addition to the tax break for manufacturers, the new law includes a provision that makes more companies eligible to be treated as S-corporations. S-corporations, which often are family-owned businesses, dont pay federal income taxes, but their shareholders pay taxes on distributions they receive from the businesses.


Prior to the new laws enactment, S-corporations could have a maximum of 25 shareholders, making it difficult for a multi-generational family-owned business to remain an S-corporation after the number of family members had mushroomed over the years.


Under the new law, an S-corps maximum number of shareholders has been increased to 100, and members of the same family now count as one shareholder.


For the mid-sized family businesses, its great, Sell says.


Kent Berreth, managing partner of the Spokane Valley-based accounting firm Berreth Lochmiller & Associates PLLC, says the new law also extends a provision that raised the maximum amount a business can write off through Section 179 expensing of depreciation to $100,000 per year. That level of expensing on certain business equipment has been in effect for two years and was scheduled to revert back to the previous $25,000 maximum after tax year 2005. Under the new law, however, the $100,000 maximum wont expire until the end of 2007.


Thats the biggest deal for me and my small-business clients, Berreth says.


The biggest benefit in the bill for individual taxpayers who live in Washington state is a provision that allows filers to deduct state and local sales taxes from their federal income tax. That benefit is expected to save a taxpayer between $300 and $500 annually (See related story, B3).


In addition to the tax benefits, the American Jobs Creation Act of 2004 tightens previously abused rules.


One of the more notable new restrictions is on whats become known as the SUV loophole. In 2003 and through most of this year, a business could write off through Section 179 expensing up to $100,000 of the cost of any large passenger vehicle.


The new law reduces the amount that can be expensed annually for such big rigs to $25,000, effective Oct. 22.


The law also adds requirements for writing off the charitable donation of a vehicle, boat, or airplane, Sell says. A taxpayer still can write off such a donation, but must provide certain information about the vehicle, plane, or boat and the charity to which its donated.


Theres a lot of sentiment at the IRS that people were abusing that deduction, by overestimating the value of donated vehicles, he says. This significantly clamps down on those valuations.


The law also places new restrictions on deferred compensation. Through deferred compensation, an employer sets aside part of an employees salary for the employee to receive later, in some cases after the employee retires. Payment of taxes on the income also is delayed.


Hesse says that starting next year, employees must decide upfront when they will receive the deferred compensation, and it will be more difficult to change that date in most cases. Also, he says, the bill requires an individual to report all deferred compensation annually.


A considerable number of new penalties for use of tax shelters comes into play under the new law. The IRS has cracked down on tax shelters in recent years, Sell says, and the new law gives the agency more ways to penalize those who use such questionable investment harbors.


Sell says there is no clear definition of what constitutes a tax shelter. Generally speaking though, tax shelters are schemes that the IRS deems inappropriate, and that many times they involve transactions with no effect other than to generate tax savings, he says.


The extender law


The Working Family Tax Relief Act of 2004 is what Hesse refers to as the extender law. He says it doesnt include any new tax-code provisions, but extends the term on some tax breaks that either had expired already or were scheduled to change before long.


Here are some of the more significant provisions that were extended:


Research and experimentation credit: A business that does research to develop or to improve a product receives a tax credit for that R&D cost in addition to being able to expense the related wages and supplies. That credit expired in June, but was reinstated retroactively through 2005.


Teacher deduction: A provision that allowed a school teacher to deduct up to $250 for personal purchases of school supplies expired at the end of 2003, but was reinstated for this year and next.


Marriage-penalty relief provision: This provision increased the size of the 15 percent tax bracket for married couples, so a greater amount of the earnings of such couples was taxed at a lower rate than would have been the case otherwise. This break was set to expire at the end of this year, but has been extended through 2005, Hesse says.


Alternative-minimum tax exemption: Individual taxpayers who take a large number of deductions or write-offs, allowing them to pay little or no tax, can be subject to an alternative-minimum tax. A taxpayer pays the larger of the alternative-minimum tax or the amount of tax owed after the deductions. The amount of allowed deductions was raised last year so that fewer people were subject to the alternative minimum tax, and that provision now is applicable for 2005.