Greetings,

This issue of Tax Tips is devoted to activities that have to be done by December 31, 2004. Before I give you those tips, I want to mention 2 things:

1) On November 18, 2004 the Los Angeles City Council adopted a package of tax reforms that substantially change the city business tax. The key parts of the reforms will phase out the city business license for businesses that gross less than $100,000 by 2006. It will also eliminate the tax on bad debts, gradually reduce the tax by 15% for all businesses with gross receipts over $100,000, reduce the tax burden on small and medium-sized production companies by adjusting tax rates, exempt film industry workers earning up to $300,000, reduce the categories used to pay tax from 75 to 7 and allow businesses to pay tax on a cash or accrual basis.

2) Our office will be closed on Thanksgiving Day, November 25th and Friday, November 26th.

Now for the Tax Tips:

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Bonus depreciation ends

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The 2003 Tax Act raised the first-year bonus depreciation rate on new assets purchased from 30% to 50%. This is in addition to the regular depreciation allowed. The 50% bonus rate expires on December 31, 2004. Under the bonus depreciation rules, up to 50% of the cost of the asset may be expensed in 2004, the remaining amount must be depreciated over the asset's useful live. If you are considering buying assets for your business or rental soon you may want to consider placing them in service before the end of 2004.

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Time is running out for the 2004 gift tax exclusion

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An effective way to reduce your taxable estate is to make regular use of the annual gift tax exclusion. You may give up to $11,000 each year to as many individuals as you want without any gift tax liability. If you’re married and your spouse joins in the gift, you may, as a couple, give $22,000 to each person annually without any gift tax liability.

Once December 31, 2004, has come and gone, your 2004 gift tax exclusion is also gone. So if you plan to make gifts this year, remember that your gifts must be completed by that date. For instance, gift checks must actually be deposited or cashed, and stock transfers must be completed no later than December 31.

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Certain retirement accounts must be opened by December 31, 2004

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If you are considering starting a retirement account and it is anything besides an IRA, the account must be opened by December 31, 2004. This means that the account paperwork must be done and the account must be opened with a minimum deposit (sometimes as little as $100). The plan does not have to be fully funded until the entity files it's tax return, but the account must be opened.

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State taxes should be paid

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If you pay estimated tax payments or think you may owe money to the state, you may benefit from making those payments before the end of the year to get a deduction for 2004.

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Take advantage of capital losses

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If you have a security that you know is a stinker, you might want to unload it before the end of the year to offset any capital gains that you realized during the year. Even though long-term capital gains are taxed at a more favorable tax rate, zero is still the best rate around.

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Watch out for the dreaded Alternative Minimum Tax

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Individuals must compute their taxes using two rates, the regular tax rates and the alternative minimum tax rate, then pay the higher of the two. Although the alternative minimum tax (AMT) was originally designed to apply only to those who took advantage of certain tax breaks, the current rules include more and more taxpayers. Before doing anything, it's important to determine your exposure to AMT. Common causes of AMT are the exercise of incentive stock options, recognizing a large capital gain, payment of state income taxes or a significant amount of miscellaneous itemized deductions.

If you think you may be subject to AMT or need further details and assistance on any of these items, give us a call.

Have a wonderful Thanksgiving.

Linda