Surfing a Wave of Tax Changes

Question: The year is young, but I've already encountered tax law changes that affect my business. If the knuckleheads in Washington keep revising the rules, how are entrepreneurs like me supposed to keep up? I want to avoid trouble and make sure I'm not overpaying. Where do I get help?

Answer: Last year produced a bumper crop of small business tax law changes that are taking effect right now. In fact, there were more tax shakeups in 2004 than at any time since a massive overhaul in 1986. Some were new laws; others are rule changes issued by the IRS. Together they add up to a lot for small business owners to digest.

Some moves ended previous tax breaks. For example, "bonus depreciation" - an additional 50 percent deduction for the cost of business equipment beyond regular depreciation - is gone. And Congress closed the "SUV loophole" that let business owners immediately deduct the entire cost of a large sport utility vehicle.

But according to George Jones, a senior tax analyst at CCH, Inc., over a dozen business tax credits and deductions due to expire last year were extended through 2005, including the work opportunity tax credit, welfare-to-work tax credit, research credit and charitable contributions of computers to schools, among others.

And starting this year, many small businesses can claim a significant new tax deduction for "manufacturing" production activities. The key, says Jones, is that "manufacturer" is defined broadly. Many business owners will be surprised to hear they qualify. Businesses that stand to benefit include traditional manufacturers, as well as computer software makers and companies involved in construction, engineering, energy production, film and video production and food processing. The change will effectively lower their income tax rate by three percent this year, rising to nine percent by 2010.

Beyond the big changes, however, are many lesser changes that can cost your business a bundle if you miss them. Here are a few that the American Institute of Professional Bookkeepers has dug up:

1. To deduct cell phone usage, at least half of your cell calls must be for business and you'll need records to prove it.
   
   
2. "Industry practice" can be used to qualify workers as independent contractors and not employees. In a key 2004 court case, a local cable TV firm argued successfully that paying installers as independent contractors was industry practice.
   
   
3. Some employee gifts are now taxable income. A certificate for, say, a turkey at a local store is now taxable wages.
   
   
4. New state laws protecting employee Social Security numbers are sweeping the country. Check the rules in your state to avoid employee lawsuits involving identity theft.
   
   
5. The rules for S-Corporations were altered to allow up to 100 shareholders instead of just 75, and to count a family as a single shareholder.
   

These resources can help you stay informed and find professional help:

• Business Owner's Toolkit, a service of business information publisher CCH, Inc., offers a huge amount of information and advice on business tax issues, available free at its Web site. There are also specialized books and tax services you can buy. Visit www.toolkit.cch.com.
  
  
• The IRS itself is an excellent source of small business tax information "from the horse's mouth." A resource-laden Web site for small businesses and the self-employed is easy to navigate and covers every tax topic you can think of. Visit www.irs.gov/smallbiz.
  
  
• The American Institute of Professional Bookkeepers offers courses and publications that can help you or someone on your staff become savvier on business tax and financial matters. Visit www.aipb.org.
  
  
• Need an accountant with special expertise in your type of biz? CPAdirectory.com lists 450,000 CPAs nationwide. Searchable database helps locate CPAs by name, location, specialization and industries served.
  
  
• Enrolled Agents are licensed by the Federal government to offer advice and prepare tax returns for individuals or businesses. They are savvy tax experts, and often former IRS employees, but generally don't have the degrees of CPAs or attorneys, and tend to charge less for their services. To find an EA in your area, visit the National Association of Enrolled Agents Web site at www.naea.org or call (800) 424-4339.