Five New Rules You Shouldn't Miss.
Taxes may be one of life's certainties, but the rules governing them always seem to change. This tax season is no exception. A slew of new regulations passed in 2006, including the sweeping Pension Protection Act, affect everything from phone bills to 401(k) plans. "For an off-year, there was a lot of legislation," says Brian Whitlock, a partner at Chicago accounting firm Blackman Kallick. We've highlighted five changes to help you get a leg up on this year's returns.
- Dial up deductions
After years of defending the federal telephone excise tax against lawsuits, the U.S. government has finally conceded that the 3 percent levy on long-distance bills--first introduced in 1898 to help pay for the Spanish-American War--has no place in the digital age. The Treasury Department ditched the tax in May. The IRS is now issuing refunds, in the form of tax credits, to any company or individual who paid "surcharges and taxes" for landlines, cell phones, or VoIP service in the past three years. File for the credit by submitting IRS Form 8913 with your company's 2006 tax return. "For businesses that have a lot of contact with customers, it could be a fairly significant number," says Jerry Jolly, a partner at the Baton Rouge, Louisiana, office of accounting firm KPMG.
- Go paperless, or else
Last year, in an attempt to reduce processing errors, the IRS required large companies to file returns electronically. This year, businesses that have $10 million or more in assets and submit at least 250 returns, including W-2s and 1099s, must follow suit. "This is going to affect a lot of small companies and most midsize companies," says Beth Wiggins, an accountant at BKD in Houston. Instead of mailing tax forms, companies must now submit returns using IRS-approved tax software or an electronic format recognized by the IRS, such as XML. What's more, the agency will automatically reject returns that include vague terms like "various" rather than exact dates and numbers. It may take a few extra days to get the returns right, warns Wiggins. She suggests preparing early to make the deadline and avoid errors.
- Make 401(k)s a must
Retirement plans not only encourage employees to save for the future, they also trim the company tax bill. And the more tax-deductible contributions employees make, the bigger the savings. Thanks to the Pension Protection Act, which was signed into law in August, businesses can automatically deduct 401(k) contributions from employee paychecks starting next year. Right now, employees have to sign themselves up for the plans. The maximum automatic contribution for the first plan year is 3 percent. If workers don't like it, the onus will be on them to opt out.
- Come clean
In June, the Financial Accounting and Standards Board passed new rules governing tax disclosures on financial statements. Until now, companies could omit disputed tax bills on financial reports sent to creditors and investors. Now businesses that are likely to lose tax disputes must disclose the amount in question. The rule is vague, but the point is to give a complete picture of your company's financial health. If you don't disclose the dispute and a big tax bill crops up unexpectedly, you're likely to run into trouble with your investors.
- Stay in the U.S.A.
The IRS introduced the domestic manufacturing credit in 2005 in an attempt to stem the tide of overseas outsourcing. This year the credit is equal to 3 percent of a company's net income. Next year the IRS plans to double the amount to 6 percent. And old-line manufacturing companies aren't the only ones that benefit. The tax break also applies to businesses that make software, music, and films, as well as construction, engineering, and architecture firms and producers of electricity, natural gas, and drinking water. To apply, submit IRS form 8903 with your tax return. Bob Pruger, CFO of Rudolph/Libbe Cos., a contractor in Walbridge, Ohio, plans to do just that. "Three percent of our net income is nice," says Pruger, who expects a tax break in the low six figures. "The savings will get passed on to our shareholders."