Summary of the 2003 Economic Stimulus Plan

By Jonathan Chapman, Feeley & Driscoll, P.C.

President Bush unveiled his latest economic stimulus plan on January 7, 2003.  Containing more than $670 billion in tax cuts for individuals and businesses over a 10-year period, the plan contains many eye-catching proposals.  The following are some of the more significant parts of the Bush plan. 

Dividends

Viewed by many as an inequitable double-tax on corporate earnings, this proposal would exclude dividends paid by corporations from taxable income at the shareholder level.  In general, corporate earnings are subject to a double tax, once at the corporate level and again, upon distribution, at the shareholder level.  The proposal would eliminate the second-level of tax at the shareholder level to the extent such funds distributed by the corporation were subject to corporate level tax.  For example, if a corporation has income of $1,000 and pays $350 in federal income tax, the balance of $650 would be eligible for the dividend exemption.

In addition, to the extent the corporation retains corporate-taxed earnings, the shareholders’ basis in their corporate stock is increased.  Continuing with the previous example, if the corporation instead retained the after-tax earnings of $650, the shareholders would increase the tax basis in their stock, thereby ensuring that such earnings are not taxed at the back end when the stock is sold or redeemed. 

On the negative side, interest paid on debt incurred to purchase stock would not be deductible. 

Small Business Section 179 Allowance

Small and mid-sized businesses may expense certain depreciable fixed asset additions (e.g., machinery, equipment, furniture) up to $25,000 in 2003.  This amount is phased out as the cost of such assets exceeds $200,000.  Under the Bush plan, the annual expense limitation is increased to $75,000 and is phased out as such assets exceed $325,000 beginning in 2003. 

Accelerated Marginal Rate Cuts

Many will recall the reduction in marginal personal tax rates over the next four years under the 2001 Economic Growth and Tax Relief Reconciliation Act.  The Bush plan would accelerate the scheduled rate reductions scheduled for 2004 and 2006 and make them effective January 1, 2003.  As an example of the effect of this provision, a married couple with two children, $100,000 of income and $15,000 of itemized deduction would see their 2003 federal income tax decrease by over $1,500.  Add to that Bush’s proposed increase in the Child Credit, the savings increases by over $2,300. 

As individual rates continue to decrease, corporate tax rates are no longer a bargain making pass-through business structures such as sole proprietorships, partnerships and S corporations more attractive.   

We realize that this short memo can’t answer all of the questions that concern you regarding the economic stimulus plan and how it can benefit both you and your company.

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