One of my proudest moments to date as president of the NAHB was the opportunity to attend the White House ceremony when President Bush signed landmark legislation to cut taxes. Of course, I was honored to attend. But even more important was the knowledge that the NAHB played a vital role in working with the Bush administration to enact this legislation, which represents a great victory for the housing industry. In fact the NAHB was the only housing organization involved in deliberations for the bill--a circumstance directly attributable to the reasoned, collaborative approach we adopted.
Provisions of the economic growth package that the NAHB helped shepherd through Congress are already producing good news for consumers, home builders, and other small businesses. Moreover, thanks to the NAHB's ongoing involvement, the law also preserves the value of the low-income housing tax credit. The bottom line is that in addition to trimming billions of dollars off the nation's tax bill, this new legislation will help home building businesses to save money and grow.
What it means
Effective this year, small businesses can immediately begin deducting as much as $100,000 that they spend on equipment they put into service. This is a fourfold increase over the $25,000 allowed previously. Some 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, include:
* A sole-proprietor home building company with taxable income of $150,000 buys a new piece of equipment for $50,000. New provisions for deducting the purchase cost reduce the company's taxes from $37,200 to $28,000--saving $9,200.
* A company with income of $250,000 buys a $50,000 piece of equipment and cuts its taxes from $79,200 to $66,000--a $13,200 savings.
* A builder with $400,000 in income who buys a $100,000 piece of equipment slashes taxes from $142,560 to $105,000--saving $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.
Maximize your gains
The new law also encourages investment by reducing income from capital gains and dividends to a maximum 15 percent tax rate. Under prior law, the top tax rate on dividends was 38.6 percent. For those in the two lowest income tax brackets, the dividend and capital gains tax rates have been reduced to 5 percent and will fall to zero percent in 2008. Builders need to be aware of two important provisions in order to gain maximum advantage for their businesses.
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.
Of course, taxes are always tricky, so be sure to consult your tax analyst or accountant in order to devise the best possible financial strategy for maximizing tax benefits under the new law.