Tax Talk Today(r) January Webcast Covers 2005 Tax Law Changes Affecting Business Returns
(Comtex Energy Via Thomson Dialog NewsEdge)WASHINGTON, Jan 13, 2006 (U.S. Newswire via COMTEX) --On the January 10 Webcast of Tax Talk Today, a panel of IRS officials and tax professionals discussed a wide range of tax law changes that will affect 2005 business returns (Part 1 of 2).
One wide-reaching piece of legislation discussed by the panel is the Gulf Opportunity Zone Act of 2005, which was signed into law just a few weeks ago on December 21, 2005, and is intended to ease burdens and stimulate growth for the areas affected by the 2005 hurricane season. Some key provisions of this legislation include:
-- Form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents : The form a custodial parent gives to the non-custodial parent to release the dependency exemption. Use the new version of the form, and be sure to attach it to the tax return.
-- Form 4684, Casualties and Thefts: The Casualty Loss Form, which eliminates casualty loss limits for Hurricane Katrina losses, has been extended to include Hurricanes Rita and Wilma.
-- Form 8863, Education Credits (Hope and Lifetime Learning Credits): For parents sending students to school in certain parishes in Louisiana and certain counties in Mississippi and Alabama, maximum credits are now expanded for the Hope Credit and the Lifetime Learning Credit.
The IRS cautioned tax practitioners to pay careful attention to the terminology of the new Gulf Opportunity Zone Act. Different zones - which were created specifically for each of the three major hurricanes in 2005 - mean that each benefit must be examined separately and may not apply in the same way for all three hurricanes. For example, taxpayers in the Hurricane Katrina zone the deadline for tax payments falling on or after September 15, 2005, is now February 28, 2006. For taxpayers in the Hurricane Rita zone the deadline for tax payments falling on or after September 23, 2005, is now February 28, 2006. For taxpayers in the Hurricane Wilma zone the deadline for payments falling on or after October 23, 2005, is now February 28, 2006.
"The good news is, we have a new Publication 4492, which contains tax information for taxpayers affected by Hurricanes Katrina, Rita, and Wilma," said Bob Erickson, senior technical advisor, Tax Forms and Publications, IRS.
Publication 4492 - Tax Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma - will be available by the end of this month.
A key change for 2005 business returns is the Domestic Production Activities Deduction, under Code Section 199.
"We think it will be a fairly significant issue, and a lot of people will be claiming it," said Ed Mikesell, chief, Business Review, Tax Forms and Publications, IRS.
"I think it's a really neat piece of legislation. It's going to benefit a larger base than I think we all know," said Caryle M. Breeden, EA. "I don't think this is really common knowledge for the taxpayer base themselves."
Business activities qualifying for the deduction are:
-- The manufacture, production, growth, or extraction in whole or significant part in the United States of tangible personal property (e.g., clothing, goods, and food), software development, or music recordings;
-- Film production (with exclusions provided in the statute), provided at least 50 percent of the total compensation relating to the production of the film is compensation for specified production services performed in the United States;
-- Production of electricity, natural gas, or water in the United States;
-- Construction or substantial renovation of real property in the United States including residential and commercial buildings and infrastructure such as roads, power lines, water systems, and communications facilities; or
-- Engineering and architectural services performed in the United States and relating to construction of real property.
" If the taxpayer manufactures, produces, grows, or extracts personal property of any kind, whether it be crops or anything, they might be entitled to this deduction," said Mikesell.
The new Form 8903, due out in a few weeks, calculates the amount of the Domestic Production Activities Deduction.
For 2005, the deduction equals three percent of the lesser of: (a) taxable income derived from a qualified production activity; or (b) taxable income, for the taxable year. However, the deduction for a taxable year is limited to 50 percent of the W-2 wages paid by the taxpayer during the calendar year that ends in such taxable year. In 2010, when the deduction is fully phased- in, the three percent rate will have increased to nine percent.
The IRS advised tax practitioners to look to three main sources of information on Section 199, which includes the Domestic Production Activities Deduction: Notice 2005-14, proposed regulations published under Code Section 199, and the instructions for the new Form 8903.
"This is a complicated deduction," commented Mikesell.
Other key changes for 2005 business returns, as highlighted by the Tax Talk Today panel, include:
Extension of time to file: Some business returns, including Forms 1065, 1066, 1041, and some other, less common forms, now will use Form 7004 for any tax year beginning in 2005 to receive a six-month extension of time to file. The IRS will send out notices only in those cases in which the extension has not been granted.
Standard mileage rates: Standard mileage rates are a bit unusual for businesses this year, with the rates affected by the dates of the driving as follows: $0.405 cents per mile, January 1, 2005, through August 31, 2005; $0.485 per mile, September 1, 2005, through December 31, 2005. (Beginning January 1, 2006, the rate changes again to $0.445 per mile.) Accurate record-keeping is the key to making the most of these rates. "I now give my taxpayers a little tablet, 50 cents, and share with them that this will save them hundreds and hundreds of dollars." said Ruth Ann Michnay, CPA.
More hurricane-related changes: Benefits applying to all three hurricane areas include an increased reforestation expense deduction for small timber producers. Also, employers who paid their employees while the business was inoperable due to one of the hurricanes can get a credit for the wages paid, depending on the dates. In addition, charitable contributions related to hurricane relief may not be subject to the usual limits, if the cash contribution was made on August 28, 2005, and ending on December 31, 2005, and was specifically earmarked for Hurricane Katrina, Rita or Wilma.
Plan contribution limits: the limits on contributions to 401(k)s, 403(b)s, 457s and SIMPLE plans have gone up, with another raise in limits expected for 2006. Section 197 Intangibles Amortization Recapture: A new provision states that, if multiple intangibles (such as copyrights, trademarks and patents) are sold after August 8, 2005, then, for the purpose of computing income recapture, those items must be treated as a single item for the purposes of the calculation.
Energy Efficient Commercial Building Deduction: A deduction of up to $1.80 per square foot for installing lighting systems, heating, cooling, ventilation, hot water and/or the building envelope that are certified as meeting certain savings requirements. The certification process for this deduction is not yet in place.
The deduction is allowed in the year in which the property is placed in service. The amount of deduction reduces the taxpayer's basis in the property. The provision is effective for property placed in service after 2005 and before 2008.
Energy Efficient Home Credit: For the homebuilder or the home manufacturer, this deduction applies if the building meets certain energy efficiency requirements. The credit amount is up to $2,000 per home, or $1,000 per manufactured home. To qualify for the credit, work on the home must have been substantially completed after August 8, 2005. In addition, the home must be purchased for use as a primary residence in 2006 or 2007.
Distilled Spirit Credit: Intended for wholesalers, distillers and importers, this is a credit for the cost of financing the excise tax due on those items, and begins after September 30, 2005.
Alternative Motor Vehicle Credit: Applied to both business and personal use of hybrid, natural gas and some diesel vehicles, this credit can range from $650 to $3,000 per vehicle. A related credit, Alternative Fuel Vehicle Refueling Property, provides a credit for the unit that compresses natural gas to allow refueling of an alternative motor vehicle.
Before adjourning, the Tax Talk Today panel advised tax practitioners to beware of common errors when preparing 2005 business returns. While the IRS posts the top errors for each form, some errors show up across all forms: filing in the wrong location, providing incorrect or illegible entity information, and unnecessary attachments.
"There are many forms, schedules, worksheets, balance sheets that are done to create a return - many of which are not necessary to be sent in with the return," said Peggy Bogadi, deputy director, Submission Processing, Wage and Investment Division, Customer Account Services, IRS. "It may cause questions."
Shannon K. Gould for Tax Talk Today,
301-588-2900 ext. 102 or firstname.lastname@example.org
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