TAX

    Responding to public pressure and the rising price of gas, the IRS just increased the standard mileage rate that can be used to claim deductions, as well as employee reimbursement, for business driving. For the second half of 2008 -- from July 1 through December 31 -- the rate jumps to 58.5 cents for every business mile traveled (plus business-related parking fees and tolls). The previous rate of 50.5 cents per mile remains in effect for January 1 through June 30. (IRS Announcement 2008-63)
    The change reflects the soaring cost of gasoline across the country. Normally, the IRS updates the rate before the start of each year. However, a mid-year increase is not unprecedented. The IRS used a blended rate for the 2005 tax year due to rising gas prices. If prices continue to escalate, another bump could be forthcoming.
    Background: If you use your vehicle for business trips, you generally have a choice of deducting your actual expenses or using the standard mileage rate:
     Actual Expenses - As the name implies, you can write off the actual expenses attributable to business travel, including gas, oil, tires, insurance, repairs, licenses and registration fees and so on. In addition, you can claim a depreciation deduction for the vehicle, based on its business use. For example, if you use your car 80 percent for business, you're entitled to deduct 80 percent of the regular depreciation allowance.
    However, annual depreciation deductions are limited by the "luxury car" rules.
   The main drawback to this method is that you must account for every expense you incur as well as keep detailed records of every business trip.
     Standard Mileage Rate -Alternatively, you might opt to use the standard mileage rate established by the IRS. With this method, you don't have to account for all of your actual expenses, although you still must record the mileage for each business trip, the date, the destinations, the names and relationships of the business parties and the business purpose of the travel.
    Let's look at how the blended rate works in 2008. For simplicity, let's say you drive 1,000 miles a month on business. Your deduction for the first half of 2008 is $3,030 (50.5 cents times 6,000 miles) while your deduction for the second half is $3,510 (58.5 cents times 6,000 miles). Thus, the total deduction for the year is $6,540, plus business-related parking fees and tolls.
   The standard rate cannot be used if you:

• Operate cars for hire (such as taxis and limos).
• Use five or more cars at a time (such as fleet operations).
• Have claimed an accelerated depreciation deduction for the vehicle in the past.
• Have claimed a Section 179 deduction for the vehicle in the past.
• Have claimed actual expenses after 1997 for a vehicle that is leased.
• Are a rural mail carrier who has received a qualified reimbursement.

    Note: You still may fare better with the actual expense method than you do with the increased standard mileage rate. Consult with your tax adviser about your situation.

Non-Business Rates

    Besides the standard mileage rate for business driving, you may also use an IRS-approved rate if you use your vehicle for medical reasons, a job-related move or charitable purposes.
    The rate for medical travel and job-related moves increases for the second half of 2008 from 19 cents a mile to 27 cents a mile. However, the rate for charitable driving remains at 14 cents a mile. This statutory rate must be amended by Congress.

Raking In New Farm
Tax Breaks

A new farm relief act is finally the law of the land. Congress passed the legislation in May, but the President vetoed it. Just before the Memorial Day adjournment, the House and Senate joined in overriding the veto. The official date of enactment is May 22, 2008.

As you might expect, this new law, officially entitled the Food, Conservation and Energy Act of 2008, is intended to primarily benefit farmers and ranchers. Here are some of the key provisions.

Conservation Easement Donations - Qualified charitable conservation contributions include real property, remainder interests and easements.

In general, donations of appreciated charitable property are limited to 30 percent of your AGI. Any excess may be carried over for five years. For a donation of a qualified conservation easement made before 2008, the Pension Protection Act of 2006 allowed taxpayers to deduct an amount up to 50 percent of adjusted gross income (AGI) with a 15-year carryover. Even better: The contribution base was 100 percent of AGI for farmers and ranchers. Now, the new farm relief act extends this favorable tax treatment through 2009.

Racehorses - The depreciation period for racehorses is set at three years for horses placed in service after 2008 and before 2014. However, for racehorses placed in service after 2013, this fast write-off applies only if the horse was more than two years old when initially placed in service by the purchaser.

Like-Kind Exchanges - There is no tax gain or loss recognized on an exchange of qualified "like-kind property" under Section 1031 of the tax code (except to the extent that dissimilar assets are received).

In general, Section 1031 treatment is not allowed for stock swaps. However, the new law enables taxpayers to avoid current tax on an exchange involving shares of stock in the following farm-related entities: mutual ditch, reservoir or irrigation companies. This rule applies to exchanges completed after May 22, 2008.

Timber Gains - The new law provides a 15 percent alternative tax rate for corporations on taxable income consisting of gain from sales of standing timber held more than 15 years. The alternative rate applies for both regular and alternative minimum tax purposes. This tax break applies to gains in tax years ending after May 22, 2008 and before May 23, 2009.

The law also provides favorable new rules for real estate investment trusts that hold timber investments.

Alcohol Fuels Credit - Among other technical modifications in the alcohol fuels credit, the new law adds a new temporary tax credit for producers of "cellulosic biofuels."

Naturally, the new farm relief also had to raise revenue to offset the tax breaks. Significantly, it restricts the ability to claim farm losses against non-farm income for taxpayers receiving farming subsidies. Losses are limited to the greater of $300,000 or the taxpayer's total net farm income for the previous five years. The new law also increases estimated tax requirements for certain large corporations.

Congress Targets Tax Relief for the Military

Another new tax law signed by the President on June 17, 2008, provides a variety of tax benefits to military personnel and their families. Appropriately enough, the new law is called the Heroes Earnings Assistance and Relief Tax Act, or the "HEART Act." Here is an overview of the key provisions:

Economic Stimulus Rebates - Previously, if the spouse of a member of the U.S. Armed Forces did not have a valid Social Security number, the couple was not entitled to an economic stimulus rebate if they filed a joint return. The new law authorizes economic stimulus rebates for military couples filing jointly as long as one spouse has a valid Social Security number and is also a member of the U.S. Armed Forces. It also treats Adoption Taxpayer Identification Numbers as valid identification numbers for economic stimulus rebate purposes.

Retirement Plan Withdrawals - The new law permanently allows reservists called to active duty to make penalty-free withdrawals from IRAs, 401(k) plans and 403(b) plans. Normally, a 10 percent penalty applies to withdrawals made before age 59 1/2. Previously, this tax break was only available to reservists activated after September 11, 2001 and before December 31, 2007.

Flexible Spending Accounts - Similarly, the new law gives reservists greater access to flexible spending accounts (FSAs) sponsored by their employers. Effective May 22, 2008, it permits tax-free distributions of unused benefits in a health FSA for members of an Armed Forces reserve unit ordered or called to active duty.

Roth IRAs and Coverdell ESAs - Under the new law, contributions of military death benefits and military insurance proceeds may be made to a Roth IRA or Coverdell Educational Savings Accounts (ESA) without regard to the dollar caps under tax law. The 2008 limit for Roth IRA contributions is $5,000 (plus an extra $$1,000 if you're age 50 or over). Coverdell ESA contributions are $2,000 and are phased out for high-income taxpayers.

Survivor Benefits - The new law requires pension plans to provide additional benefits and accruals to survivors of plan participants who die while on active military duty. The benefits must reflect amounts provided under such plans for participants who resume and then terminate employment due to death. This provision is effective for deaths and disabilities occurring on or after January 1, 2007.

Of course, new tax laws come with a price. To pay for these benefits, higher taxes were imposed on wealthy individuals who renounce their U.S. citizenship. This provision generally applies to ex-patriots with a net worth of $2 million or more. The new law also treats foreign subsidiaries of U.S. companies as American employers for employment tax purposes.

Roundup of Other New Law Provisions

The people hired and retained by your organization either propel your operation forward or weigh it down. The choice is yours.

Here is a brief roundup of some other tax benefits in the new HEART Act:

• Differential wage payments are treated as wages for purposes of withholding, IRA contributions and in-service qualified retirement plan distributions.
• A temporary differential pay tax credit (20 percent of differential pay up to $20,000) is created for small employers.
• Tax-free combat pay is permanently treated as earned income for purposes of the Earned Income Credit.
• The home sale exclusion is liberalized for certain members of the intelligence community and Peace Corps volunteers.
• Retired veterans are granted more time to claim tax refunds after disability determinations.
• Supplemental Security Insurance is enhanced for veterans.