Monday, November 13, 2006

2007 Standard mileage rates for the use of a "car"

Beginning Jan. 1, 2007, the standard mileage rates for the use of a car (including vans, pickups or panel trucks) will be:
48.5 cents per mile for business miles driven;
20 cents per mile driven for medical or moving purposes; and
14 cents per mile driven in service to a charitable organization.
The new rate for business miles compares to a rate of 44.5 cents per mile for 2006. The new rate for medical and moving purposes compares to 18 cents in 2006. The primary reasons for the higher rates were higher prices for vehicles and fuel during the year ending in October.

Friday, November 10, 2006

Domestic Production Activities Deduction analyzed

For those that produce goods, develop software or construct property in the U.S., regardless of whether they are exported, Congress has provided you the means to significantly reduce your tax bill.
How does the Section 199 deduction work?
The deduction is permanent in nature and is equal to a percentage of the lesser of your taxable income or net income earned from qualified production activities. It is available for tax years beginning after Dec. 31, 2004. The deduction will be 3% for tax years 2005 and 2006; 6% for tax years 2007, 2008 and 2009; and 9% for tax years 2010 or later.

What activities qualify for the Section 199 deduction?
Qualified domestic production activities include:
Manufacture, production, growth or extraction of tangible personal property, computer software or sound recordings or qualified films
Production of electricity, natural gas or potable water in the U.S.
Construction services including related engineering and architectural services performed in the U.S.

How is Qualified Production Activities Income calculated?
Domestic Production Gross Receipts minus expenses equal Qualified Production Activities Income (QPAI). Expenses include the cost of goods sold allocable to the receipts, allocable direct and indirect costs, and a ratable portion of other costs.

What's so complex about Section 199?
There are a number of interlinking issues that come into play when calculating the most advantageous Section 199 deduction. Ask yourself the following questions:

How did you define your revenue streams?
Do you have a full understanding of the relevant Section 861 regulations; and can you demonstrate how you maximized them?
Which of the three W-2 limitations is most beneficial?
What impact does the expanded affiliated group definition have on your calculation?
What state planning activities need to be re-evaluated after completing your Section 199 computation?

Figuring the Tax Deduction -
Calculating the Domestic Production Activities Deduction (DPAD) can be either simple or complex, depending on the nature of the business. The key to figuring the Domestic Production Activities Deduction (DPAD) is to examine "qualified production activities income" (QPAI) and the limitations (QPAE).

The formula
DPAD=QPAI-QPA=QPANI*3%=Tentative QPA Deduction [3% for 2005&6, higher later]
Domestic Production Activities Deduction (DPAD) Calculation Qualified production activities income (QPAI) minus Qualified production activities expenses (QPAE) equals Qualified production activities net income (QPANI) times The QPA deduction amount of 3% equals The Tentative QPA Deduction

1-Qualified Production Activity Income (QPAI)
Qualified production activity income (QPAI) is all income arising from qualified production activities in the US. For a business with only one line of business, this will be the same as gross income. For businesses with multiple lines of business, income will need to be allocated.
2-Qualified Production Activity Expenses (QPAE)
Qualified production activity expenses are all expenses directly related to the qualified production activities. For a business with only one line of business, this will be the same as total expenses. For businesses with multiple lines of business, income will need to be allocated.

Limits on the Deduction
W-2 Wages can limit the amount of the DPAD!!

General Overview
Although Section 199(a)(1) allows a deduction equal to 9 percent (3 percent in the case of taxable years beginning in 2005 or 2006, and 6 percent in the case of taxable years beginning in 2007, 2008, or 2009) of the lesser of (A) the qualified production activities income (QPAI) of the taxpayer for the taxable year, or (B) taxable income (determined without regard to section 199) for the taxable year (or, in the case of an individual, adjusted gross income (AGI)).
Section 199(b)(1) limits the deduction for a taxable year to 50 percent of the W-2 wages paid by the taxpayer during the calendar year that ends in such taxable year.

Friday, November 03, 2006

Tax items to consider before year-end

Here's a checklist of tax savings strategies to apply before the end of December:
* 1-Make Charitable Contributions and Donations: Generally, for individuals,
contributions to tax-exempt charitable organizations are limited to 50
percent of the taxpayer's adjusted gross income for the tax year. Those
unused items cluttering closets can be donated to a qualified charity or
non-profit organization and deducted as charitable contributions.
Document your donations by saving receipts, cancelled checks and any
letters or correspondence from the charity.
2-Pay property taxes in the current year, and if applicable, pay state and local income taxes now: That way you can deduct them for 2006. Any payments made on a credit card or by check dated before the end of 2006 are eligible.
3- Add to your retirement accounts: See if your 401(K) plan offers an
opportunity to "catch up" with additional contributions before year's
end. There's even more time to add to the value of your IRAs, right up
to the April 16, 2007 deadline.
4- IRAs are more generous. The deductible amount for a contribution to a
traditional IRA is up to $4,000 per person, and up to $5,000 per person
age 50 or older. In 2006, workers over 50 can make additional
contributions to their SIMPLE IRAs up to $2,500. If you're self-
employed, you can set up a Simple Employee Pension plan and contribute
up to $44,000 before April 16, 2007.
5-* Check the Amount of Your Medical Deductions for 2006: Taxpayers can
check to see if they have enough medical deductions to itemize (over 7.5
percent of adjusted gross income) this year. It's not too late to
schedule additional dentist or eye doctor appointments. However, it may
make sense to "bunch" medical deductions into one year, and plan ahead
for 2007.
6- Know What Medical Deductions Are Allowed: There are numerous medical
costs that are deductible including lasik eye surgery, doctor-prescribed
weight loss programs, and capital expenses for ramps, railings, etc.
installed in a home to accommodate disabilities. The IRS allows the cost
of smoking-cessation programs as a medical expense, but not the costs of
patches and gums. Don't overlook mileage to and from the doctors,
hospitals, and the pharmacy at 18 cents a mile in 2006.
7- Buy Supplies Now, If You're Self-Employed: Self-employed taxpayers who
use the cash method of accounting can pay bills on or before December
31, to claim the expense on a 2006 return. Stock up on necessary
supplies and equipment and take advantage of the section 179 deduction
of up to $108,000 for fax machines, computers and other big-ticket
8- Sell "loser" stocks. Perhaps you have experienced a stock market slide
and its effect on your portfolio.