Publication 553: 2003 Highlights of Tax Changes; 2. Tax Changes for Businesses

This is archived information that pertains only to the 2003 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

Business-related mileage. For 2003, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck is decreased from 36 ½ cents a mile to 36 cents a mile for all business miles.

Car expenses and use of the standard mileage rate are explained in chapter 4 of Publication 463, Travel, Entertainment, Gift, and Car Expenses.

For tax years beginning in 2003, instead of using actual costs, family daycare providers can use the standard meal and snack rates to compute the deductible cost of meals and snacks provided to eligible children. The standard meal and snack rates can be used for a maximum of one breakfast, one lunch, one dinner, and three snacks per eligible child per day. However, a family daycare provider who receives a reimbursement for a particular meal or snack can deduct only the portion of the applicable standard meal or snack rate that exceeds the amount of the reimbursement.

Family daycare providers. A family daycare provider is a person engaged in the business of providing family daycare.

Family daycare. Family daycare is childcare provided to eligible children in the home of the family daycare provider that meets all of the following requirements.

The childcare is nonmedical.
A transfer of legal custody is not involved.
The childcare generally lasts for less than 24 hours each day.

Eligible children. Eligible children are minor children receiving family daycare in the home of the family daycare provider. Eligible children do not include children who are full-time or part-time residents in the home where the childcare is provided or children whose parents or guardians are residents of the same home.

Standard meal and snack rates. The following table shows the rates for 2003.

Location of Family Daycare Provider	Breakfast	Lunch and Dinner	Snack
States other than Alaska and Hawaii	$0.98	$1.80	$0.53
Alaska	$1.55	$2.93	$0.87
Hawaii	$1.13	$2.11	$0.63

A family daycare provider who chooses to use the standard meal and snack rates for a particular tax year must use the rates for all deductible food costs for eligible children during that tax year.

For more information, see Publication 587, Business Use of Your Home.

Beginning in 2003, the self-employed health insurance deduction percentage increases to 100%. For more information, see chapter 7 in Publication 535, Business Expenses.

For tax years ending after May 5, 2003, the maximum tax rate for individuals applied to nonqualified withdrawals from the capital gain account in a capital construction fund decreases from 20% to 15%.

50% special depreciation allowance. For “qualified property” you acquired after May 5, 2003, and before January 1, 2005, you can take a special depreciation allowance that is equal to 50% of the property's depreciable basis. However, instead of claiming the 50% special allowance, you can elect to claim the 30% special allowance or elect not to claim any special allowance. See chapter 3 in Publication 946, How To Depreciate Property.

Note.

If you acquire qualified property in a like-kind exchange or involuntary conversion, the carried-over basis of the acquired property is eligible for a special depreciation allowance. See the discussion on like-kind exchanges and involuntary conversions under How Much Can You Deduct? in chapter 3 of Publication 946.

Increased section 179 limits. The maximum section 179 deduction you can elect for property you placed in service in 2003 has increased from $24,000 to $100,000 for qualified section 179 property ($135,000 for qualified zone property, qualified renewal property, or qualified New York Liberty Zone property). This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $400,000 (increased from $200,000). See chapter 2 of Publication 946.

Off-the-shelf computer software. The definition of section 179 property has been expanded to include off-the-shelf computer software placed in service after 2002. This is computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified. It includes any program designed to cause a computer to perform a desired function. However, a database or similar item is not considered computer software unless it is in the public domain and is incidental to the operation of otherwise qualifying software. See Eligible Property in chapter 2 of Publication 946.

Revocation of section 179 election. A section 179 deduction election (or any specification made in the election) made after 2002 can be revoked without IRS approval by filing an amended return. However, once made, the revocation is irrevocable.

Exclusion of qualified nonpersonal use trucks and vans from definition of passenger automobile. A truck or van placed in service after July 6, 2003, that is a “qualified nonpersonal use vehicle” is not considered to be a passenger automobile (and is therefore not subject to the passenger automobile limits). A truck or van is a qualified nonpersonal use vehicle only if it has been specially modified such that it is not likely to be used more than a de minimis amount for personal purposes. For example, a van that has only a front bench for seating, in which permanent shelving has been installed, that constantly carries merchandise or equipment, and that has been specially painted with advertising or the company's name, is a vehicle not likely to be used more than a de minimis amount for personal purposes. See Passenger Automobiles in chapter 5 of Publication 946.

Depreciation limits on passenger automobiles. The total depreciation deduction (including the section 179 deduction and the special depreciation allowance) you can take for a passenger automobile (that is not a truck or van or an electric vehicle) that you use in your business and first place in service in 2003 is:

$7,660 if acquired before May 6, 2003, and you claim the 30% special allowance;
$10,710 if acquired after May 5, 2003, and you claim the 50% or 30% special allowance; or
$3,060 if you elect not to claim any special allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property.

The limits are reduced if the business use of the vehicle is less than 100%.

Depreciation limits on trucks or vans. The total depreciation deduction (including the section 179 deduction and the special depreciation allowance) you can take for a truck or van (such as a minivan or a sport utility vehicle) built on a truck chassis that you use in your business and first place in service in 2003 is:

$7,960 if acquired before May 6, 2003, and you claim the 30% special allowance;
$11,010 if acquired after May 5, 2003, and you claim the 50% or 30% special allowance; or
$3,360 if you elect not to claim any special allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property.

The limits are reduced if the business use of the vehicle is less than 100%.

Depreciation limits on electric vehicles. The total depreciation deduction (including the section 179 deduction and the special depreciation allowance) you can take for an electric vehicle that you use in your business and first place in service in 2003 is:

$22,880 if acquired before May 6, 2003, and you claim the 30% special allowance;
$32,030 if acquired after May 5, 2003, and you claim the 50% or 30% special allowance; or
$9,080 if you elect not to claim any special allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property.

The limits are reduced if the business use of the vehicle is less than 100%.

More information. For more information on these limits, see Maximum Depreciation Deduction in chapter 5 of Publication 946.

The self-employment tax rate on net earnings remains the same for 2003. This rate, 15.3%, is a total of 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).

The maximum amount subject to the social security part for tax years beginning in 2003 increased to $87,000. All net earnings of at least $400 are subject to the Medicare part.

Business-related mileage. For 2004, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck increases from 36 cents a mile to 37½ cents a mile for all business miles.

Car expenses and use of the standard mileage rate are explained in chapter 4 of Publication 463, Travel, Entertainment, Gift, and Car Expenses.

Generally, you can deduct only 50% of your business-related meal expenses while traveling away from your tax home for business purposes. Also, you can generally deduct only 50% of certain reimbursements you make to your employees for meal expenses they incur while traveling away from home on business. You can deduct a higher percentage if the meals take place during or incident to any period subject to the Department of Transportation's “hours of service” limits. (These limits apply to workers who are under certain federal regulations.) The percentage increases to 70% for 2004. Business meal expenses are covered in chapter 1 of Publication 463, Travel, Entertainment, Gift, and Car Expenses. Reimbursements for employee meal expenses are covered in chapter 13 of Publication 535, Business Expenses.

For vehicles placed in service in 2004, the maximum clean-fuel vehicle deduction and qualified electric vehicle credit are scheduled to be reduced by 25%, as compared to 2003.

Beginning in 2004, environmental cleanup (remediation) costs must be capitalized. You cannot choose to deduct environmental cleanup costs paid or incurred after December 31, 2003, as a current business expense. For more information on environmental cleanup costs, see chapter 8 in Publication 535, Business Expenses.

Extension of acquisition date. Property will meet the “acquisition date test” for purposes of qualifying for the 30% special depreciation allowance (see chapter 3 of Publication 946, How To Depreciate Property) if the property is acquired before January 1, 2005 (extended from September 11, 2004).

Increased section 179 limits. The maximum section 179 deduction you can elect for property you place in service in 2004 is increased from $100,000 to $102,000 for qualified section 179 property ($137,000 for qualified zone property, qualified renewal property, or qualified New York Liberty Zone property). This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $410,000 (increased from $400,000). See chapter 2 of Publication 946.

The work opportunity credit and the welfare-to-work credit are scheduled to expire for wages paid to individuals who began working for you after 2003.

The New York Liberty Zone business employee credit is scheduled to expire for wages paid to qualified employees for work performed after 2003.

State and local governments issue qualified zone academy bonds to raise funds for the use of certain eligible public schools. The national qualified academy zone bond limit for 2003 was $400 million, but is zero for 2004 (excluding any carryover limitation).

Wage limits. For social security tax, the maximum amount of 2004 wages subject to the tax increases to $87,900. For Medicare tax, all covered 2004 wages are subject to the tax. For information about these taxes, see Circular E (Publication 15), Employer's Tax Guide.

The self-employment tax rate on net earnings remains the same for 2004. This rate, 15.3%, is a total of 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).

The maximum amount subject to the social security part for tax years beginning in 2004 increases to $87,900. All net earnings of at least $400 are subject to the Medicare part.

Extension of time to claim the 30% special depreciation allowance. You still may be eligible to claim the 30% special depreciation allowance for a tax year that included September 11, 2001, if you meet the following requirements.

You timely filed your tax return for that tax year.
You did not claim the 30% special depreciation allowance (or special Liberty Zone depreciation allowance) for qualified property (or qualified Liberty Zone property) placed in service during that tax year.
You did not make an election not to claim the special allowance.

If you have not filed your tax return for the first tax year following your tax year that included September 11, 2001, and you owned the property as of the first day of that tax year, file Form 3115, Application for Change in Accounting Method, with your timely filed tax return for that year.

If you filed your tax return for the first tax year following your tax year that included September 11, 2001, before July 22, 2003, you owned the property as of the first day of that tax year, and the second succeeding tax year after your tax year that included September 11, 2001, ends before August 1, 2004, file Form 3115 with your timely filed tax return for that second succeeding tax year.

Write “Automatic Change Filed Under Rev. Proc. 2003-50” on the appropriate line of Form 3115. For more information, see Revenue Procedure 2003–50 in Internal Revenue Bulletin 2003–29.

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