You’ve probably heard about the new tax deduction for domestic manufacturers that served as the centerpiece of a new business tax law signed by President Bush. Think your company won’t qualify because you’re not technically a manufacturer? You may be surprised.
Congress threw this tax-break bone to US businesses to compensate for a repealed export subsidy. The new deduction effectively reduces the top federal income tax rate for domestic manufacturing from 35% to 32 %, phased in over the next six years.
Strategy: Tailor your business operation to qualify for this new tax break. The new law’s definition of “manufacturer” leaves plenty of wriggle room for companies-both large and small-to fit under the tent.
Here’s how it works: For 2005 and 2006, the deduction equals 3 percent of the lesser of: 1.) your company’s profit from qualified production activities for the year, or 2.) your annual taxable income. The percentage jumps 6 percent for 2007 through 2009 and then 9 percent for 2010 and beyond.
Who qualifies? The IRS will publish definitive regulations soon. But the good news is, the committee reports define “manufacturers” (and their related “production” activities) quite broadly. That means the deduction will likely be available to a wide range of domestic producers in industries such as:
• Traditional manufacturing.
• Construction.
• Engineering.
• Energy production.
• Computer software.
• Films and videotape.
• Processing of agricultural products.

The new law specifically excludes companies that are engaged solely in sales activities. Many companies will be surprised that they qualify as “manufacturers”. Example: A national coffeehouse chain will be allowed to call its coffee roasting a manufacturing process, although it lost its effort to have in-store beverage preparations qualify.
The new deduction is available to all business concerns, including C corporations, S corporations and partnerships, LLCs and even sole proprietorships.
Tip: If your company qualifies for the new deduction, it could pay to push as much income as you can into next year to benefit from the break, plus tax deferral.

Source: Research Recommendations

BUSINESS MILEAGE RATE HIKE HIGHEST ON RECORD

The optional standard mileage rate that is used to compute the deductible costs of operating an automobile for business purposes increases a record three cents in 2005, from 37.5 cents per mile to 40.5 cents per mile (Revenue Procedure 2004-64; IR-2004-139).
“The 3-cent increase in the business mileage was the largest one-year rise ever,” the IRS said in a statement.
The announcement by IRS also included the standard mileage rates for moving, medical, and charitable expense purposes.
Beginning January 1, 2005, the standard mileage rates other than business rate will be 15 cents per mile for computing deductible moving or medical expenses (up from 14 cents per mile in 2004), and 14 cents per mile for charitable expense purposes (unchanged from 2004).
Also in 2005, employers that use no more than four vehicles at the same time for business purposes may use the standard mileage rate.
The standard mileage rates for business, moving, and medical expense purposes are based on an annual study of the fixed and variable costs of operating an independent contractor on behalf of IRS, while the charitable standard mileage rate is provided in the Internal Revenue Code.

Source: Research Recommendation

TAX TICKER

No Change in “Nanny Tax” Threshold. Security Administration (www.ssa.gov) announced that the “nanny tax” threshold will remain at $1,400 for 2005. So, if you employ a domestic worker in your home, you must pay employment taxes if the worker’s wages for the year exceed $1,400. The limit applies separately to each domestic worker.
Bigger Tax Break for Hybrid Vehicles. The recently signed tax law allows you to claim a tax deduction of up to $2,000 for new (not used) certified “clean-burning fuel” vehicles placed in service in 2004 and 2005. Prior to the law change the maximum deduction was scheduled to be $1,500 for 2004 and $1,000 for 2005. Also, the IRS certified the 2005 Toyota Prius as a hybrid vehicle qualifying the vehicle qualifying for the deduction. The 2004 model of the Prius and 2004 models of Honda Insight and Civic Hybrid also qualify.

Source: Research Recommendations

When Selling Your Company Via Installment Sale, How Much Gain is Taxed?

The concept is simple: If you’re paid in installments, you pay tax on your gain only when you receive cash. By receiving payments over several years, you’re taxed over several years. But the application of the installment sale rules is decidedly more complex. To qualify for installment-sale treatment, you must receive payments in more than one tax year. The taxable amount in a given year is typically payments received during the year multiplied by the “gross profit ratio” for the sale. This also applies to the year of the sale.
Example: You sell a group of business assets, this year for $2.5 million in 5 annual installments of $500,000. The total gain is $2 million. In this case, your gross profit ration is 80% ($2 million gain divided by $2.5 million sales price). You pay tax on $400,000 of your gain on your 2004 return (80% of $500,000 payment).

Source: Research Recommendations

IRS Increases FUTA Deposit Threshold

The IRS issues final rules (TD 9162) raising the minimum threshold for Federal Unemployment Tax Act (FUTA) deposits, a move which is intended to reduce the tax compliance burden for small businesses. Under the new rules, effective January 1, 2005, employers are required to make quarterly deposits for unemployment taxes only if the accumulated tax exceeds $500, the Internal Revenue Service says. The current FUTA tax liability threshold is $100, the Internal Revenue Service notes.

Source: Research Recommendations

Lessons from the Tax Court

Are you personally liable for withholding taxes? If a company fails to deposit withheld employment taxes, the IRS can go after any “responsible person” in the company for the money. The person would be personally liable for the missing funds. Two recent Tax Court rulings clarify who is a “responsible person”.
Case 1: A volunteer director of a parochial school was liable for underdeposited taxes because he had signatory powers over the bank account, knew about the tax liability and signed a tax return showing that no tax deposits were made. His volunteer status didn’t immunize him from liability. (Holmes, USTC 50,301, So Dist. Texas)
Case 2: The chairman of the board of a group of companies was not liable for under deposited taxes because he wasn’t involved in day-to day company operations, he never directed payroll and he wasn’t a signatory on bank accounts (Smith, USTC 40,298, Nev. Dist.)
Bottom Line: The more contact you have with payroll (signing checks and employment tax returns, etc.), the more likely you’ll be deemed a “responsible person”.
Keep good records to prove capital losses
You can use your capital losses to offset your capital gains. Plus those losses can offset up to $3,000 of your ordinary income ($1,500 if you use married-filing-separate status).
What if you show extra losses at the end of the year? You can carry forward any excess to future years, as long as you can substantiate your losses. But meticulous recordkeeping is essential.
The case: A taxpayer claimed $21,000 in short-term capital losses and long-term capital losses of more than $25,000. But she did not attach any work sheets showing her capital-loss carry-forward calculations.
To deduct amounts carried forward from the prior year, you must prove that you did incur a loss, when you incurred it, that you’re entitled to deduct the loss, the type of loss and the amount of any capital gains in the intervening years.
Aside from her previous two tax returns, the taxpayer offered little evidence to substantiate these losses. Result: The court denied her deduction for the capital loss carry-forwards.

Source: Research Recommendations

 Caution  Do not adopt any of our recommendations without consulting a tax professional

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