Heed law changes affecting ’05 returns — Business Management Daily: Free Reports on Human Resources, Employment Law, Office Management, Office Communication, Office Technology and Small Business Tax Business Management Daily
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Each year, Congress and the IRS throw a few new ingredients into the tax-return stew. Sometimes, these are completely new ingredients— such as the new manufacturing deduction for 2005 returns— and sometimes, the IRS just tweaks a golden oldie. Here are some key tax-law changes that will affect your 2005 business returns: (Next issue, we’ll focus on changes in the personal tax laws.)

New “manufacturing” deduction kicks in. Certain businesses— including some non-manufacturers, such as construction and engineering firms—can claim a new “domestic production activities deduction” worth up to 3 percent of income from the sale or rental of tangible personal property assets (e.g., clothes, goods, food, software). To earn the deduction, the product must be manufactured at least in a “significant part” in the United States. Claim the deduction on Line 35 of the 2005 Form 1040. Calculate the deduction on Form 8903.

Higher Section 179 limit. The maximum amount of qualified business asset purchases you can deduct in one year increased from $102,000 to $105,000 for 2005 returns. The limit jumps again to $108,000 for 2006 purchases (see below). The “bonus deprecation” rules that businesses benefited from in the past few years expired after 2004.

Follow the bouncing deductible mileage rate. To compensate for the spike in gas prices, the IRS adjusted the standard deductible mileage rate in mid-2005. That means, from Jan. 1 to Aug. 31, the standard rate for business use of a vehicle was 40.5 cents per mile. But from Sept. 1 to year-end, the rate increased to 48.5 cents per mile. The rate for deductible medical-related driving rose from 15 cents per mile to 22 cents per mile on Sept. 1. The rate for charity mileage remained at 14 cents per mile. (Note: For 2006, the standard mileage rate for business driving dropped to 44.5 cents per mile.)

Higher self-employment tax threshold. For 2005, the self-employment tax rate remains the same: 15.3 percent (12.4 percent for Social Security and 2.9 percent for Medicare). But the maximum amount of income subject to the Social Security part of the tax increased to $90,000 in 2005. (The threshold is $94,200 for 2006.) All self-employment earnings are subject to the Medicare tax.

Disaster-area tax breaks. Businesses in the area affected by Hurricane Katrina are eligible for several tax breaks for rebuilding, hiring and employee retention. Also, employers around the country can expand their tax breaks for corporate charitable contributions (see page 7).

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