Tax Law Changes 2006 and Tax Calendar for Small Businesses

Tax Law Changes 2006

1.Depreciation and Section 179 Expense

The maximum section 179 deduction you can elect for property you placed in service in 2006 has been increased to $108,000 for qualified section 179 properties. This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $430,000.

2. Social Security and Medicare TaxesFor 2006

The employer and employee will pay:
- 6.2% each for social security tax (old-age, survivors, and disability insurance), and
- 1.45% each for Medicare tax (hospital insurance).

Wage limits - For social security tax, the maximum amount of 2006 wages subject to the tax has increased to $94,200. For Medicare tax, all covered 2006 wages are subject to the tax.

3. Self-Employment Tax

The self-employment tax rate on net earnings remains the same for 2006 - 15.3% (12.4% for social security and 2.9% for Medicare).
The maximum amount subject to the social security part for tax years beginning in 2006 has increased to $94,200. All net earnings of at least $400 are subject to the Medicare part.

4. Standard Mileage RateFor 2006

The standard mileage rate for the cost of operating your car, van, pickup, or panel truck for your business is 44.5 cents a mile for all business miles driven.

Tax Calendar for Small Businesses

By February 1 - give annual information statements to recipients of certain payments you made during the previous year. You can use a copy of the appropriate version of Form 1099 or other information return. Payments that are covered include:

1. Compensation for workers who are not considered employees (including fishing boat proceeds to crew members)
2. Dividends and other corporate distributions
3. Interest
4. Payments to attorneys
5. Payments of Indian gaming profits to tribal members
6. Profit-sharing distributions
7. Amounts paid in real estate transactions
8. Rents
9. Prizes and awards
10. Medical and health care payments
11. Royalties
12. Amounts paid in broker and barter exchange transactions
13. Retirement plan distributions
14. Original issue discount
15. Debt cancellation (treated as payment to debtor)
16. Cash payments over $10,000. (See instructions for Form 8300 Report of Cash Payments Over $10,000 Received in a Trade or Business)

By March 1, file information returns (Form 1099) for certain payments you made during the previous year. These payments are described under February 1. There are different forms for different types of payments. Use a separate Form 1096 to summarize and transmit the forms for each type of payment. See the current year's Instructions for Forms 1099, 1098, 5498, and W-2G for information on what payments are covered, how much the payment must be before a return is required, what form to use, and extensions of time to file.

S-corporations

File your calendar year income tax return (Form 1120S) and pay any tax due by March 15. Provide each shareholder with a copy of Schedule K-1 (Form 1120S), Shareholder's Share of Income, Credits, Deductions, etc. or a substitute Schedule K-1. If you want an automatic six-month extension of time to file the return, file Form 7004 and deposit what you estimate you owe.
If you were given an automatic six-month extension, file your calendar year income tax return (Form 1120S) and pay any tax due by September 15. Provide each shareholder with a copy of Schedule K-1 (Form 1120S) or a substitute Schedule K-1.
To elect S corporation status, file Form 2553, Election by a Small Business Corporation, by March 15 to choose to be treated as an S corporation, beginning with current calendar year. If Form 2553 is filed late, S treatment will begin with the next calendar year.

Partnership

File your calendar year return (Form 1065) by April 15. Provide each partner with a copy of Schedule K-1 (Form 1065), Partner's Share of Income, Credits, Deductions, etc., or a substitute Schedule K-1. If you want an automatic three month extension of time to file the return and provide Schedule K-1, file Form 8736. Then file Form 1065 by July 15. If you need an additional three month extension, file Form 8800.
If you were given an automatic three-month extension, file your calendar year return (Form 1065) by July 15. Provide each partner with a copy of Schedule K-1 (Form 1065), or a substitute Schedule K-1. If you need an additional three month extension, file Form 8800.
If you were given an additional three-month extension, file your calendar year return (Form 1065) by October 15.

Electing large partnerships

To elect large partnership status, provide each partner with a copy of Schedule K-1 (Form 1065), Partner's Share of Income Credits, Deductions, etc., by March 15 following the close of the partnership's tax year. The due date of March 15 applies even if the partnership requests an extension of time to file the Form 1065-B by filing Form 8736 or Form 8800.CAUTION! As this was being prepared, Congress was considering legislation that would make this requirement effective for partnership tax years beginning after December 31, 1997.

For fiscal year tax payers

If you use a fiscal year (rather than a calendar year) as your tax year, you should change some of the dates in the general tax calendar. Use the following general guidelines to make these changes.

1. Partnerships

Form 1065 is due on the 15th day of the fourth month after the end of the partnership's tax year. Provide each partner with a copy of Schedule K-1 (Form 1065), or a substitute Schedule K-1.

2. Corporations and S Corporations

Form 1120 and Form 1120S (or Form 7004) are due on the 15th day of the third month after the end of the corporation's tax year. S Corporations must provide each shareholder with a copy of Schedule K-1 (Form 1120S), or a substitute Schedule K-1.

Estimated tax payments are due on the 15th day of the 4th, 6th, 9th, and 12th months of the corporation's tax year.

Form 2553, used to choose S corporation treatment, is due by the 15th day of the third month of the first tax year to which the choice will apply or at any time during the preceding tax year.

Last-minute tax tips.

This year the IRS says it's ready to focus on taxpayers who run small, unincorporated businesses. So, if you file Schedule C, look out. The biggest portion of unpaid tax is in underreporting of income by individuals. Normally, that's individuals who are filing Schedule C. That's the form used by small, unincorporated businesses. Some say the IRS is already focusing on small businesses.

Here are some ideas as 2006 dwindles to a close. Keep in mind, it's best to consult an accountant, as there are exceptions to every strategy. Much will depend on whether your small business uses the cash-basis or accrual-method of accounting. Also, many small businesses are S corporations or limited liability companies (LLCs), meaning income and losses are reported on the owners' personal tax returns.

Buy some equipment

One way to reduce your taxable business income is to take advantage of obtainable deductions. A tax rule known as Section 179 allows companies to deduct up to $108,000 for assets that are used in their business and that are bought and used in that year. To take advantage, think about equipment purchasing that you may have been putting off, such as a new computer. But, if you plan to claim this deduction, you need to be using the item for business at least 50% of the time. If, for example, 55% of the time spent on your new computer is for personal pursuits, you can't use Section 179 to write off the cost of that asset. Still, you may be able to depreciate over a few years the cost of an asset used both for business and personal purposes, but be sure to document how you use the item. Note also that not all assets are enclosed in this rule. For instance, you can't use Section 179 to write off real estate. And, you can only use a Section 179 deduction to the extent that you have business income (that is, you can't use it to generate a loss).
For cars, you are limited to a first-year depreciation of $3,060, but you can deduct up to $25,000 for some SUVs.

Pay bills now and get paid later

Most Schedule C filers use a cash-basis system that means they have to pay their expenses prior to year-end for them to be deductible. Consider paying as many of your business expenses as you can to take full advantage of the deduction for business expenses. Don't forget health-insurance premiums, because medical insurance premiums and long-term-care premiums are 100% deductible for self-employed individuals. Also, if possible, try to defer income. If you can stand the effect on your cash flow, things that you might usually bill for in December, you wait and bill in January, or you bill them so late in December that you would not expect to be paid until January.

Put in order your records

Now is the best time to get your receipts and other business records in order. If you're taking a deduction for a business purchase, such as a car or computer, organize your records regarding your business use of that item. For the car, for example, you are supposed to keep a log, a written log is what the IRS really wants to see, including the dates you drove the car, mileage driven and destinations. Your good records may save you money in the end.

Behave like you've already been notified, don't wait till the notice comes in and then try to put together all of your records, mainly the records that relate to your expenses. You want to make sure that the expenses you have are properly reflected.

Don't get blindsided

One reason new business-owners need to prepare for a tax hit: Social Security taxes. For people who are really just starting out, remember that basically the net income that you're going to report on that Schedule C is going to be treated as self-employment income and subject to the self-employment tax. That is, you'll likely face Social Security tax on the first $94,200 of wages in 2006 (that figure increases every year, rising to $97,500 in 2007).

Set up a qualified retirement plan before Dec. 31, and make deductible contributions to it for 2006.

If you want to maximize your contributions, remember you have to maximize your employees' too. Don't have the cash to fund it now? Think about a Simplified Employee Pension Plan, as funding can be delayed until the company's extended tax-return date.

Adjust owners' wages for tax benefit.

Salary decisions are tricky, and some owners wait until the end of the year to see what share of the profits to take. Generally, if you're an S Corporation, you want to take as little in compensation as possible, and if you're a C Corporation, you want to take as much as possible. (That's because tax consequences are different, depending on the company's legal structure.) But beware: Wages that are too high or too low may attract unwelcome attention from the Internal Revenue Service.