CLIENT ALERT

January 8, 2005

New Year, New Planning

The New Year is always a good time to look ahead and begin to make plans for yourself and/or your business. For many, 2005 has already shown that it will be a particularly beneficial year as a result of the recently passed American Jobs Creation Act of 2004 and the Working Families Tax Relief Act of 2004. With the passage of both these new tax laws are significant opportunities to help you and your business lower your overall tax payments. Knowing how they affect you or your business is the first step in maximizing their benefits in 2005.

The following include some of the new laws, which are scheduled to begin January 1st:

Manufacturers' Deduction

Effective January 1st, this somewhat deceiving deduction will be made available to a number of businesses. Despite its name, the manufacturers' deduction was created to benefit a considerable number of businesses not traditionally thought of as manufacturers. These will include traditional manufacturers as well as construction firms, engineering and architectural firms, film and video production companies, computer software makers, agricultural processors, and even certain service providers may qualify in part. The deduction starts at 3 percent and grows to 9 percent by 2010.

S Corporation Reform

In 2005, the popularity of S Corporations should only continue, due in part to an increase in the number of permissible shareholders from 75 to 100. If you are thinking of starting a business, or converting your business to a different structure, the new rules make S corporations very attractive. All of these changes apply to tax years beginning after December 31, 2004.

Standard Mileage Rates

Beginning January 1, 2005 the new IRS standard mileage rates will take effect. The IRS extended the rates to be used by taxpayers using no more than four vehicles at the same time for business purposes. This will significantly reduce the amount of time a small business spends maintaining records and recording vehicle usage. As of January 1, 2005 the standard mileage rates will be:

• 37.5 cents a mile for all business miles driven
• 14 cents a mile when computing deductible medical or moving expenses
• 14 cents a mile when giving services to a charitable organization

Business Credits and Deductions

Over a dozen business tax credits and deductions that had expired have been extended through 2005, including the work opportunity tax credit, welfare-to-work tax credit, research credit, charitable contributions of computer technology and equipment used for educational purposes, and many more.

Unfortunately, not everything will be a benefit in 2005. Included in the new tax bills are a number of deductions, which will no longer be available or their impact will be reduced after December 31, 2004.

Some of these include:

Bonus Depreciation

Businesses will no longer be able to benefit from this deduction, which had previously allowed an additional 50 percent of the cost of business equipment and other property to be deducted in addition to regular depreciation.

Vehicle Donations

Unfortunately, donating a car in 2005 will not give you as great of a deduction as you may have received in the past. Under the new tax law, you may only deduct an amount equal to the value received by the charity upon sale of the vehicle.

If you have questions on how your business may be affected by these changes we invite you to contact our office at your convenience and we will be happy to address any issues you may have.