Sy Accountancy Corporation

704 Mira Monte Place, Pasadena, California 91101

Tel (626) 744-0200, Fax (626) 744-0300, vsy@victorsycpa.com

FEDERAL TAX UPDATE FOR BUSINESS

By Victor Sy, CPA, MBA

1. Meals & Entertainment deduction increases to 70% for 2004 and 2005.

2. Auto Standard Rates:

(Cents per mile) 2002 2003 2004 2005 9/05 2006

Business 36.5 36 37.5 40.5 48.5 44.5

Charitable 14 14 14 14 14 14

Medical & Moving 13 12 14 15 22 18

3. Extension Of Liberalized Section 179 Deduction: The new law extends the current Section 179 deduction of $105,000 ($106,000 for 2008) for two additional years after which the maximum will return to $25,000. This tax-friendly provision was scheduled to expire in 2006 but has been extended to 2008.

4. Reduced Section 179 For SUV'S: The new law scales back Section 179 deduction to $25,000 for heavy SUV'S with gross vehicle weight ratings of 14,000 pounds or less. Old law allowed SUV'S with gross vehicle weight ratings of more than 6,000 pounds to qualify for the $100,000 deduction. The new lower deduction won't apply to any vehicle that (1) is designed to seat more than nine passengers (hotel shuttle van); (2) has an open cargo area of at least six feet in length (pick-ups with full size cargo beds); or (3) has an enclosure for the driver and has no seating behind the driver (delivery van).

5. New 15-year Depreciation Recovery Period For Leasehold Improvements: Whereas current law requires leasehold improvements to be depreciated over 39 years, the new law establishes a 15-year recovery period for leasehold improvements placed in service before 2006. Tip: The new shorter period applies to improvements through December 31, 2005. It also applies to restaurant improvements.

6. New Rules For Start-Up And Organizational Expenditures: Current law allows taxpayers to amortize start-up and organizational expenses over 60 months. New law allows taxpayers to deduct up to $5,000 of start-up costs and another $5,000 for organizational expenses but extends the period of amortization from 60 months to 15 years for expenditures that are not deducted in the year trade or business begins. The $5,000 allowance is also reduced by the excess of expenditures over $50,000.

7. S Corporation Changes: The new law allows family members to be treated as one shareholder. It increases the number of shareholders from 75 to 100. The new law also allows a beneficiary of a Qualified Subchapter S Trust (QSST) to deduct its share of suspended S corporation losses when the QSST disposes the related S corporation stock. It even allows S corp losses that were suspended due to basis limitations to be transferred to a spouse (or former spouse in divorce cases).