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Now that the White House is settled — and the winner of
the popular vote is safely ensconced as a visiting professor
of journalism and public policy at three universities throughout
the country — what can average DJ-business owners (and their
wallets) expect from the newest Bush Administration?
For starters, President George W. Bush is confident that
the Republican Congress will approve the massive tax cut
that comprises the bulk of his economic program — “as soon
as possible,” in the President’s words. Even Alan Greenspan,
the Buddha of the Federal Reserve, has voiced lukewarm approval
for the President’s plan.
Meanwhile,
Bush’s plans have been further boosted by a new estimate
from the Congressional Budget Office, which now predicts
that the federal surplus will be billions of dollars bigger
than previously believed. And according to the Senate Budget
Committee, that surplus through the year 2010 will total
$5.7 trillion.
But
just how much of these extra dollars will the average DJ-business
owner see?
Unfortunately,
the majority of the tax cuts that we can expect under any
new legislation will center around personal savings, not
business tax cuts. So, unless business tax provisions are
included, benefits for DJs will be the same as everyone
else.
Still,
the Bush plan would replace the five current tax rate brackets
(15-, 28-, 31-, 36- and 39.6-percent) with four brackets
of 10-, 15-, 25- and 33-percent. So, in other words, a family
in the middle-fifth income bracket would pay $453 a year
less in federal taxes. (A family in the top one-percent
would pay $46,072 less.) The plan also contains provisions
regarding such personal items like the child tax credit,
the so-called “marriage penalty” and the repeal of the estate
tax, which would enable you to pass your DJ business down
without fears of it being sold or broken up just to pay
“death” taxes.
Reality
Intrudes
Every year, the percentage of tax returns that are audited
decreases; many economists and several lawmakers have called
for the IRS to take action. Treasury Secretary Paul O’Neill
will certainly request an increase in the IRS budget. Already,
in the current fiscal year, additional funds have been earmarked
to the IRS for the hiring and training of more revenue agents.
This will increase the amount of examinations of tax returns,
specifically business audits, which are extremely productive
for auditors.
Capitalizing
Expenses
As mentioned, if President Bush and the Republicans are
successful in diverting those projected budget surpluses
back into the pockets of taxpayers, few expect the resulting
tax cuts to benefit small businesses. In addition, a few
controversies exist that appear unlikely to be resolved
any time soon.
For several years now, the IRS has appeared hell-bent on
requiring every small business to capitalize their expenses.
They’ve forced the issue, requiring many who pay commissions,
incur business startup costs and loan origination fees to
capitalize them rather than claim an immediate tax deduction.
(When the IRS demands that an expenditure be “capitalized”
rather than immediately “expensed” and deducted, they are
saying that the capital expenditure will result in an asset
that will benefit the business for more than one year. Thus,
if you buy a new amp, the improvement in the quality of
your work will result in an increase in your income for
as long as that amp lasts. Thus, by capitalizing the cost,
that expense will be written off or deducted over the period
of time that amp remains useful or productive to your business.)
So,
if the IRS is pursuing its own agenda, why do we need lawmakers?
The IRS’s principal functions are those of collection and
enforcement. However, even with uncertainty about new legislation,
there are plenty of old laws on the books that are just
now coming into play to keep every accountant and tax specialist
busy for months. Consider, as a few examples, (1) rules
change by inflation, (2) staggered effective rates and dates
and, of course, (3) new interpretations of old tax laws
and rules.
Don’t
Overlook The Changing Basic Deductions
The
deduction for the health insurance expenses of self-employed
DJs, for example, has increased incrementally from 1998’s
40-percent level to 60-percent in both 1999 and 2000. Self-employed
DJs can deduct 60-percent of amounts paid in 2000 for health
insurance for themselves, spouses and dependents from their
gross income. The deduction remains at 60-percent through
2001 and then increases to 70-percent in 2002 and 100-percent
in 2003 and thereafter — all without action by our lawmakers.
Those DJs who utilize a home office should not neglect the
broadened availability of the home office tax deduction,
thanks to a ruling by the U.S. Supreme Court a couple of
years ago. That deduction is now available in situations
where a home office is used for administrative and management
functions. On the other side of the home-office expense-deduction
issue, laws passed two years ago may have an adverse impact
on any DJ who wishes to take advantage of this write-off.
The tax law change merely removed the age (55 years) restriction
on the tax law section that exempted up to $250,000 of the
gains resulting from the sale of a principal residence from
being taxed. So, this windfall – in other words, where $250,000
of the profits from sale of a residence can be ignored for
tax purposes — to many successful DJs who plan to sell their
homes and move to a larger one somewhere down the road may
be impacted. Unfortunately, claiming a portion of the home
as a home office may prevent that home from qualifying as
a “residence” and benefiting from the exclusion. Family-owned
mobile entertainment businesses are now entitled to a unique
exclusion from estate and gift taxes that, in effect, rewards
those DJs who choose to ignore the thorny question of business
succession. That exclusion is generally equal to the difference
between $1.3 million and the standard estate tax exclusion
for the year in question. Although it is the estate of a
deceased DJ that benefits, thanks to this exclusion and
the standard exemption, a qualified family business interest
with a value of up to $1.3 million can pass, untouched by
estate taxes, to the DJ’s heirs. Low-Tax Profits and Capital
Gains Generally, for sales of long-term capital assets —
investments, property, CD library, etc. — capital gains
rates of 20-percent or 10-percent will apply after December
31, 2000, provided, of course, that the regular long-term
holding period has been met (i.e., more than 12 months).
However, a lower capital gains rate of 18-percent (8-percent
for individuals in the 15-percent tax bracket) may be applied
if the individual held the asset more than five years. As
a general rule, an individual in a marginal tax bracket
higher than 15-percent must acquire an asset after December
31, 2000, in order to have the special lower capital gains
rate for five-year property apply. However, those individuals
may make a special election to treat pre-January 1, 2001,
property as being acquired on January 1, 2001, and thus
make the property eligible for the five-year holding period
rule. In order to make this unique election, the individual
must treat the asset as if it were sold on January 1, 2001
or the next business day at its fair market value. Any income
tax due on the gain from this deemed sale of the asset must
be paid. If the individual would realize a loss from this
deemed sale, the loss is not recognized. DJs who want to
take advantage of this election may have it apply to readily
tradeable stock, any other capital asset as well as certain
property used in the taxpayer’s trade or business (i.e.,
business property defined in Code Section 1231(b)). The
2001 Tax Bill Even without tax law changes, it can be safely
predicted that the tax bills of many DJs will continue to
rise in the months ahead. Automatic inflation adjustments
will result in increased Social Security withholding or
self-employment tax bases. In 2001, the tax base on which
Social Security taxes are due will increase from $76,200
in 2000, to $80,400 in 2001, meaning that self-employed
DJs can stop paying self-employment taxes when their income
exceeds that amount. Taxes for self-employed DJs use the
same earnings base as those employed for tax withholding
purposes, but the rates are double those of employees since
the self-employed also pay the “employer” portion of the
taxes. This means that higher-earning, self-employed DJs
may owe as much as $520.80 in additional self-employment
tax in 2001 although they can recoup some of this amount
through a deduction on their federal income tax return.
Although the tax rate for the Old Age, Survivors and Disability
Insurance (OASDI) portion of FICA has held steady at 6.2-percent
since 1990, the amount of wages subject to the tax has steadily
increased each year, based on a national wage index. The
tax rate for the Hospital Insurance or Medicare portion
of FICA is 1.45-percent and it applies to every dollar of
earnings. This amount is matched by employers and doubled
for the self-employed. The Crystal Ball However, even if
the combined weakness of the new president and the virtually
deadlocked Congress fail to enact new legislation, DJs can
remain confident that the IRS will embark on other, equally
well-publicized programs that will impact your tax bills.
The tax cut proposals are still in the early stage but at
this point it does not look as if the average DJ will reap
huge savings from any tax laws that eventually emerge. Fear
not, however, the big guns, the lobbyists for business have
yet to be heard from. What business breaks will be included
— if any — remain to be seen.
If
you have any questions for TCB, please write to
DJ
Times c/o TCB,
25 Willowdale Ave.
Port Washington, N.Y., 11050
fax 516-944-8372
e-mail djtimes@testa.com.
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