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Tax
Times E-News |
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The Tax Relief and Health Care Act of 2006 adds over 200 changes to a revised Tax Code. It passed both houses of Congress, and President Bush signed it into law on December 20, 2006. We wanted to make you aware of some of the noteworthy changes made: Research Tax Credit. The new law extends the Research Tax Credit to amounts paid or incurred in 2006 and 2007. The research credit is generally equal to 20 percent of “qualified research expenses” that exceed a base amount; however, a taxpayer may elect to take the “alternative incremental credit” (AIC). The elections made for the AIC will be treated as timely if made no later than April 15, 2007. For 2007, the new law also makes two enhancements that could make the credit more valuable for many businesses: 1) It increases the “stated percentage” for calculating the AIC, and 2) It created an Alternative Simplified Credit. If you have any questions about the Research Tax Credit, please contact Kevin O’Connell, CPA, JD. Leasehold and Restaurant Improvements. The new law extends the 15-year recovery period for certain leasehold and restaurant improvements through 2007 retroactive to January 1, 2006. Generally, qualified leasehold improvement property is any improvement to an interior portion of a nonresidential building. Some items, such as elevators and escalators, are expressly excluded. Certain improvements to restaurants also qualify for the tax break where more than 50 percent of the building’s square footage is devoted to the preparation of, and seating for on-premise consumption of, prepared meals. Note that the improvements must be made to a building that has been in service for at least three years. Corporate Donations of Computer and Scientific Equipment. The new law extends and enhances through 2007 the deduction for corporate donations of scientific property used for research, computer equipment and technology to schools and public libraries. For contributions made after 2005, the provision expands the deduction to allow equipment “as assembled by” the donor to qualify for the deduction. Deduction for State and Local General Sales Taxes. The present law allowing taxpayers to elect to deduct state and local sales taxes in lieu of state and local income taxes has been extended through 2007. Taxpayers who want to take advantage of this deduction may want to “load” big ticket items into 2006 and possibly defer state income tax payments until next year. This is most advantageous for taxpayers residing in the states with no income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Elementary and Secondary Teachers' Classroom Expense Deduction. Teachers and other education workers (including instructors, counselors, principals and classroom aides) who work at least 900 hours during the school year are eligible to take the above-the-line deduction for classroom expenses of up to $250 through 2007 (retroactive to January 1, 2006). Eligible expenses include classroom supplies, such as paper, pens, books, computer equipment and software. Expenses exceeding $250 may be deducted as a miscellaneous itemized deduction subject to the 2 percent floor by eligible taxpayers who itemize.
Higher
Education Tuition Deduction. The new law
extends the above-the-line deduction of higher education
tuition and fees through 2007 retroactive to Taxpayers may want to estimate their adjusted gross income (AGI) for 2006 and, if it is within the cut-off for taking the deduction, pay spring tuition in December. Generally an education deduction or credit will be allowed for expenses paid in 2006 for enrollment during 2006 or for an academic period beginning in 2006 or in the first three months of 2007. Deferring income into 2007 to make the AGI cut-off level for a 2006 education deduction could also make sense. Credit for Prior-Year Minimum Tax Liability for Taxpayers with Unused Alternative Minimum Tax (AMT) Credits. The new law recognizes that many taxpayers have been hit with AMT bills that far exceed the income of the sale value of their stock subsequent to the exercise of incentive stock options (ISOs). The law allows taxpayers who have unused AMT credits to claim a refundable credit that is not less than the “AMT refundable credit amount.” The refundable credit phases out for higher-income taxpayers exceeding threshold amounts. The provision is effective January 1, 2007, and ends on December 31, 2012. This credit requires a very complex calculation and may impact 2007 projection and estimated tax payment amounts. If you have AMT credits related to ISOs and would like to discuss the refundable credit, please contact Jay Feller, CPA. Information Returns Affecting Incentive Stock Options. The new law requires employers to make an information return with the IRS (in addition to providing information to the employee) regarding the transfer of stock pursuant to the exercise of an incentive stock option and to certain stock transfers regarding employee stock purchase plans. The provision is generally effective for taxable years beginning after the date of enactment. Deduction for Energy-Efficient Commercial Buildings. Qualifying taxpayers may deduct costs associated with energy-efficient commercial building property. The deduction is available for energy-efficient commercial buildings that reduce annual energy and power consumption by 50% compared to American Society of Heating, Refrigeration and Air Conditioning Engineers' standards. The property had to be placed in service after December 31, 2005. The new law extends this deduction through 2008. If you have any questions, please contact Dan Dickerson, CPA. Business Credit of Energy-Efficient New Homes. Eligible contractors may claim a tax credit for qualified new energy-efficient homes that they construct and that an individual acquires from the contractor in 2006 and 2007. The credit is generally $2,000 for a new energy-efficient home and $1,000 for a new energy-efficient manufactured home. The new law extends the credit to homes whose construction was substantially completed after December 31, 2005, and purchased after December 31, 2005 through 2008. If you have any questions, please contact Dan Dickerson, CPA. Health Savings Accounts (HSAs). HSAs were created in 2004 and consist of a high-deductible health plan with a savings account attached, which consumers can fund with pretax dollars and use to pay for their out-of-pocket health expenses. The new tax law includes several provisions designed to make HSAs more attractive from a tax standpoint.
Unrelated Business Taxable Income of Charitable
Remainder Trusts Modified. Premiums for Mortgage Insurance on Qualified Personal Residences Permitted as an Itemized Deduction. The provision provides that premiums paid or accrued for qualified mortgage insurance by a taxpayer (for contracts paid or accrued beginning January 1, 2007 and ending December 21, 2007) in connection with acquisition indebtedness on a qualified residence of the taxpayer are treated as interest that is deductible. The amount allowed as a deduction is phased out ratably according to the taxpayer’s AGI and is not allowed if the taxpayer’s AGI exceeds $55,000 (MFS) or $110,000 (MFJ). This is a nice provision for middle-income taxpayers, but it is very limited and for a short period of time. To discuss how these new provisions affect your tax situation, please contact your Somerset advisor or any member of our Tax Team at 317.472.2200, 800.469.7206 or info@somersetcpas.com. Please note: Since technical information is presented in generalized fashion, no final conclusion on these topics should be made without further review.
Somerset
CPAs, P.C. The information in this email may be privileged and confidential. It is intended only for those named in this email. Copying and distribution of this communication by parties other than the above addressee is strictly prohibited without prior consent. This document and attachments are not intended or written to be used, and cannot be used, for the purpose of avoiding tax penalties that may be imposed on the taxpayer. If you receive this email in error, please notify the sender immediately. Thank you, Somerset CPAs, P.C.
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