| President Bush
signed into law the Tax Increase Prevention and
Reconciliation Act of 2005 on May 17, 2006. The key
components of the act focus on individual income
taxes. However, the act also includes several
important business tax changes.
Click here for
Individual Income Tax Changes.
Click
here for Tax Relief and Health Care Act of 2006
Changes
affecting small business
Extension of $100,000 small-business
expensing election through 2010. Under
current law, a small business may deduct up to
$100,000 of investments in qualifying depreciable
assets through 2007. The deduction, though, is
reduced dollar-for-dollar to the extent the
taxpayer’s annual investments exceed $400,000
(subject to inflation adjustments). The
inflation-adjusted deduction limit for 2006 is
$108,000 with an investment limitation of $430,000.
Without the extension made by the new law, for
taxable years beginning after 2007, small businesses
would have been able to deduct only $25,000 of
investments in qualifying depreciable assets placed
in service in the taxable year, including a
dollar-for dollar phase-out to the extent the annual
investments exceeded $200,000.
Wage limitation on manufacturing
deduction. The manufacturing deduction
allows qualified taxpayers to deduct an amount equal
to a phased-in percentage of either taxable income
or qualified production activities income, whichever
is less. Under current law, the domestic
manufacturing deduction is also limited to 50% of a
taxpayer’s total W-2 wages. The new law modifies the
wage limitation so that taxpayers may only include
W-2 wages that are deducted in arriving at qualified
production activities income. This provision is
effective for taxable years beginning after the date
of enactment (May 17, 2006).
Advice:
- This is a revenue-raising provision and is
of special interest to industries that rely on
contract labor (independent contractors) who are
not employees.
- Separating the wage component and
categorizing wages between qualified production
activity and other activity could be a
time-consuming task.
Other business tax changes
The act contains several other important
business tax changes affecting multinational
businesses and various targeted industries.
These changes include:
- a temporary controlled foreign
corporation provision that will provide
U.S. multinationals with additional
flexibility to move active foreign
income without triggering U.S. tax
consequences;
- extension of the subpart F exception
for active financing and insurance
income;
- simplification of the active trade
or business requirement for tax-free
spin-off transactions; and
- tax relief relating to environmental
cleanup funds, certain tax-exempt bonds,
the U.S. shipping industry, music
publishers and songwriters.
Some tax increases
Key business tax increases in the new law
include limiting the foreign earned income
exclusion for housing expenses; repealing
the foreign sales corporation and
extraterritorial income exclusion benefits
for certain “grandfathered” contracts;
denying tax-free treatment to certain
“cash-rich” spin-off transactions; and
requiring withholding after 2010 on
government contract payments.
The act also modifies certain corporate
estimated tax payment requirements for large
corporations (those with at least $1 billion
of assets), requires reporting of interest
on tax-exempt bonds, and applies the
earnings-stripping rules to corporate
partners. Other business revenue-raisers
affect foreign investors in U.S. real
estate, major integrated oil companies and
pooled financing bonds. |
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