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In an unprecedented move in response to the recent
spike in gasoline prices, the IRS announced a mid-year change in its
standard business mileage deduction rate - from 40.5 cents per mile
to 48.5 cents
 per mile. Rates for driving in connection with charity
work, education or moving have also been increased.
Ordinarily,
the standard business mileage rate is set for the entire year at
the end of the prior year and
maintains
that rate throughout
the year. Not in 2005. Because of rising gasoline prices, the
IRS announced a special increase to 48.5 cents per mile for
vehicle use between September 1, 2005 and December 31, 2005. The
rate for travel before September 1, 2005 remains at 40.5 cents
per mile.
For now, the
IRS said it will wait until later this year to announce the
standard mileage rates for 2006. If gas prices continue to rise,
the mileage rate will increase even further. If
gas prices decrease,
the IRS warns that the standard mileage rate, too,
will more than likely decrease.
Standard mileage rate basics
The standard mileage rates allow
taxpayers to deduct vehicle operating expenses without having to
prove every detail through receipts. The standard rate applies to
the use of automobiles, vans, pickups, and panel trucks and to
vehicles that are leased as well as owned. Standard rates are
provided for business, medical, moving, and charitable uses of a
vehicle during the year.
Taxpayers should be prepared to
substantiate their miles: the miles driven, the dates they used the
vehicle, the location where the taxpayer worked, and the services
performed. Taxpayers claiming the standard mileage rate also can
deduct parking fees and tolls, but cannot deduct expenses for
gasoline, oil, tires, insurance and repairs, and license and
registration fees.
You cannot use the standard mileage
rate for one period and the actual expense method for the other.
Whatever method is chosen must be used for all of 2005.
Business standard rate
The business standard mileage rate
can be used by employees and self-employed individuals. If the
standard rate is used, business taxpayers must record a deemed
depreciation "deduction" of 17 cents per mile for 2005 for purposes
of figuring the vehicle's tax basis. Taxpayers claiming the standard
rate must use straight-line depreciation for the vehicle if they
later switch to actual vehicle expenses. Use of an accelerated
method or bonus depreciation in an earlier year entirely
disqualifies the taxpayer from later switching to the standard rate.
Business taxpayers cannot use the
standard rate if they use five or more vehicles at the same time.
Medical, Moving and Charitable
Expenses
The IRS also raised the rates for
computing medical, moving and charitable expenses. For medical and
moving expenses, the IRS raised the standard rate to 22 cents per
mile for the period September 1, 2005 to December 31, 2005. The rate
is 15 cents per mile for the first eight months of 2005.
Taxpayers using a personal vehicle
for charity work ordinarily can claim a tax deduction of 14 cents
per mile, instead of actual expenses. This rate is set by the Tax
Code. In the Hurricane Katrina Tax Relief Act, Congress increased
the rate for Katrina relief workers to 70 percent of the standard
business rate -- 34 cents per mile -- for the period September 1,
2005 to December 31, 2005. If a Katrina relief volunteer is
reimbursed for the cost of using his or her automobile, the
reimbursement is excluded from income, up to the full standard
business rate.
Come in for service?
If you are confused about how the
change in the standard mileage rates affects your particular tax
situation, please call us for an appointment. While we cannot promise
you a free oil change, we can help tune up your tax records and
overall strategy to get the most tax deductions per mile for your
vehicle use.
The standard rates apply to local
travel and travel away from home. The increased rates for business,
medical and moving expenses are available to all taxpayers, not just
taxpayers affected by Hurricane Katrina.
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to find other calculators on this and other financial issues.
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 You have a killer business plan. Financing has
been approved and your marketing plan is in the works. Now you
need the right space for your business. Here are some things to
remember when you are leasing commercial space.
What’s in Your Wallet?
Before you even start looking, have a realistic
idea of what you want and how much you can afford to pay for it.
Especially if you are just starting out, you will not want to
drastically under- or overestimate your needs.
 Baltic Avenue or Park Place?
Once you’ve found suitable space, do some
research. How long has the space been empty? What are comparable rents
and vacancy rates in the area? Find out as much as you can about
the space and market conditions in the surrounding area. A
little knowledge could save you a bundle.
Negotiate, Negotiate, Negotiate!
When you reach the contract phase, get your
lawyer involved. Even on a standard contract, everything is
negotiable. You have to play fair, but you have the right to ask
for anything. Here are a few negotiating points:
Escape clause. Have the contract include the right to
sublease the space or assign the lease in case something happens
and you need to get out of the lease.
Escalation charges. Make a deal that limits your share of
the landlord’s future tax, insurance, and other cost increases.
Signage. Cover this early in your discussions if you have
specific requirements.
Renovations. Make sure you can adapt the space to fit
your needs. The landlord may even absorb some of the costs if
the renovations improve the property.
Restrictive covenant. Consider asking your landlord not
to rent space nearby to businesses that would compete with
yours.
Remember, this could be the beginning of a
relationship. The ideal lease is one that is satisfactory to you
and your landlord.
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Suppose for a moment that you are comparing two
possible investments — one is a tax-exempt municipal bond, the other is
a corporate bond that pays taxable interest. Apart from the tax
treatment, the bonds appear comparable in all significant respects. You
want to determine which bond will pay you the most interest after taxes
are taken into account.
To do the calculation, you need to know your
marginal tax rate — the rate at which your last dollar of income will be
taxed (federal and, if applicable, state). Then follow the steps
listed below. (The accompanying example assumes a 35% marginal tax rate
and a 7% yield on the taxable bond.)
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Subtract your marginal tax rate from 100% (100%
– 35% = 65%).
-
Multiply the result by the percentage yield on
the taxable bond (65% × 7% = 4.6%)
-
Compare the result (4.6%) to the tax-exempt
bond’s yield to see which is higher.
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 My
eight-year-old son went to day camp this summer. Does the cost
of day camp qualify as an expense for the child care credit?
Yes, if you sent your son to camp so that you (and, if married, your
spouse) could work. The credit rate ranges from 20% to 35%
(depending on your income) on up to $3,000 of expenses for the year
($6,000 for two or more children).
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 Who says Uncle Sam doesn’t give presents? Some
birthdays come with an extra surprise — a tax break.
Baby Bonanza
Add to the family? Add an exemption. A dependency
exemption is available the year your child is born if you
provide your little bundle’s Social Security number. Your children
may continue to qualify as dependents until they reach age 19 (age
24 for full-time students). In 2005, the exemption amount is $3,200.
(The exemption is phased out above certain income levels.)
You may also qualify for a child tax credit
for each child under age 17. The child tax credit is $1,000 per
qualified child in 2005. Again, the credit is phased out above
certain income amounts.
Kiddie Care
Working parents of children under age 13 may be able
to get a break on day-care expenses. The child care tax credit
is 20% to 35% of the amount spent on day care, depending on income.
The maximum amount of expenses eligible for the credit is $3,000 for
one child, $6,000 for two or more.
Teen Time
When teens reach age 14, they get their own tax
break. Before that age, unearned income over a certain amount
($1,600 in 2005) is taxed at their parents’ highest marginal rate.
At age 14, this “kiddie tax” ends and teens are taxed at their own
rate (10% on taxable income up to $7,300 in 2005) on earned and
unearned income.
If you’re a sole proprietor in a trade or business
and your under-18-year-old child works for you, you both get breaks. The
teen’s wages are not subject to FICA (Medicare and Social Security)
tax.
Over Thirty
Some birthdays are tax warnings. At age 30, the
beneficiary of a Coverdell Education Savings Account (ESA) generally
will receive a distribution of any remaining funds within 30 days.
Income tax will be due on the earnings and a 10% penalty tax as
well. But you won’t have to worry about the 10% penalty tax on early
withdrawals from tax-deferred retirement accounts and IRAs once you
reach age 59½.
The “Golden” Years
You can celebrate your 65th birthday with an
additional standard deduction. But, after you reach age 70½, Uncle
Sam wants you to start making up for all those years of tax deferral
in your traditional IRAs and, in most cases, your retirement plan.
That’s when required minimum distributions start — and they’re
taxable income.
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 If you’re a small
business owner, you control your company’s bank accounts and can
write checks to pay the bills as you see fit. Perhaps you also have
a corporate credit card that you use for convenience.
Are you careful to
keep your personal expenses separate from your business expenses? If
the IRS audits your business return, you’ll have to be able to show
that what you are calling deductible expenses are just that —
ordinary and necessary trade or business expenses.
In a recent case,
the owners of a closely held corporation couldn’t prove that a
number of the purchases they had charged on their corporate credit
cards were made for business reasons. The charges — made at
restaurants, hotels, airlines, gas stations, and retail outlets —
were deemed to be personal in nature. Not only were the amounts not
deductible by the corporation, but they also had to be treated as
“constructive” dividends paid from the corporation and, as such,
constituted taxable income to the owners.
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 You
know that your company must pay competitive salaries to attract and
retain key employees. But have you given much consideration to fringe
benefits? They, too, can be an important component of an employee’s
compensation package. If a particular benefit receives favorable tax
treatment, that’s even better.
Health Benefits
Medical insurance. Dental
insurance. Vision care coverage. Providing these benefits is getting
more costly each year. To the extent your company can provide health
benefits, however, they are likely to be highly valued by employees. In
a recent Employee Benefit Research Institute study, workers ranked
health insurance as the most important benefit by a wide margin.
Employer-paid health insurance premiums are deductible by the employer
as a business expense; employees receive the benefits tax free.
Retirement Plan
Next to health insurance, a
retirement plan is probably the most sought-after benefit. The cost to
your company — and the benefits you can provide yourself and other key
employees — will vary based on the type of plan you offer. Employer
contributions, as well as the earnings on those contributions, are not
taxed to employees until they receive plan benefits. With a 401(k) or
SIMPLE plan, your employees also can contribute on a pretax basis.
A Company Car
This perk may have a lot of
appeal, but there are tax consequences. Employees who are given a
company car to drive for personal purposes must pay income taxes on the
value of their personal use.
Life and
Disability Insurance
Group term life insurance
coverage and disability insurance are commonly offered fringe benefits.
Each of your employees generally can receive up to $50,000 of coverage
under a group term life policy on a tax-free basis. Additional amounts
will result in taxation of the “cost,” as determined using an IRS table.
You also can provide disability insurance on a tax-free basis, if
desired. However, your employees will have to pay income taxes on any
amounts that might be paid to them under such policies.
These are just a few of the
fringe benefits your company might consider offering. We’d be pleased to
help you weigh the alternatives.
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