Several expired or expiring tax provisions were not addressed in TIPRA, including the research and experimentation tax credit, the work opportunity tax credit, the welfare-to-work credit, the state and local sales tax deduction, and the 15-year recovery period for leasehold improvements and restaurant property. Many of these are expected to be addressed in further tax legislation likely to emerge in the summer.

If you have any questions regarding the application of specific provisions, please contact us to discuss how these changes will affect you and your business.

In brief, here are the highlights included in this legislation.

Tax Savings:

• Section 179 Extended
• Capital Gains and Dividend Tax Rate Extended
• Alternative Minimum Tax Exemptions Increased
• Personal Credits Continue
• Songwriters Hit a High Note

Tax Costs:

• Tax Payment Schedule Adjusted for High Asset Corporations
• Production Deduction (Section 199) Modified
• New Reporting of Tax Exempt Interest Earnings
• "Kiddie Tax" Expanded
• Roth and Roll for the Movers and Shakers
• Withholding Added for Government Payments
• Partial Payments Required for Offers in Compromise

Section 179 Extended
Many small businesses have been able to deduct capital equipment additions under Section 179 of the Tax Code. In recent years, the deduction has been capped at about $100,000 per year for businesses with total qualifying additions below $400,000. This election was set to revert to a prior law deduction limit of $25,000 at the end of 2007. Under TIPRA, the Section 179 deduction will extend through 2009, and it allows for expensing of up to $108,000 (for 2006) of certain depreciable business assets. This deduction continues to be reduced to the extent that current asset additions exceed $400,000 (inflation adjusted to $430,000 for 2006).

Capital Gains and Dividend Tax Rate Extended
Previously set to expire at the end of 2008, the current capital gain and dividend tax rate (generally 15 percent) will continue through the end of 2010. If it had expired in 2008, dividends would have reverted to ordinary income status and capital gains capped at a 20 percent maximum rate.

Alternative Minimum Tax Exemptions Increased
For married tax payers, the alternative minimum tax (AMT) exemption amount will increase from $58,000 in 2005 to $62,550 in 2006. For singles, it will increase from $40,250 to $42,500. This increase is expected to significantly reduce the growth in the number of taxpayers subject to this tax.

Personal Credits Continue
As in 2005, certain nonrefundable personal credits will again be allowed to offset both regular tax and AMT in 2006. These credits include the dependent care, the elderly and disabled, the hope, the lifetime learning, and the DC homebuyer's credit. Also, as a result of this extension, two new residential energy improvement credits added in 2006 will offset both regular tax and AMT. Without this change, personal credits would have been limited to the excess of regular tax liability over AMT.

Songwriters Hit a High Note
Taxpayers can now elect to treat income from the sale or exchange of self-created musical compositions or copyrights in musical works as the sale or exchange of a capital asset. This election would apply to sales or exchanges in tax years beginning after May 17, 2006, and prior to January 1, 2011. In a related provision, a new five year amortization rule is elective for taxpayers making advances to songwriters.

Tax Payment Schedule Adjusted for High Asset Corporations
For 2006, the estimated tax payment schedule for corporations with assets of $1 billion or more is slightly adjusted. Any corporate estimated income tax installment due in July, August, or September is increased to 105 percent of the estimated tax payment otherwise due. However, the next quarterly estimated tax installment is reduced by an amount equal to the prior quarter's increase.

Production Deduction (Section 199) Modified
Minor modifications were made to the Section 199 Domestic Production Activities Deduction, which first came into effect in 2005. The provision provides for a deduction of 3 percent in 2005 and 2006 (and up to 9 percent in later years) for income in qualifying industries, principally manufacturing, agriculture, construction, and energy generation.

The law has required the taxpayer to have wages to claim the deduction. For tax years beginning after May 17, 2006, the W-2 wage limit applicable to the Section 199 domestic production deduction is amended from 50 percent of the taxpayer's W-2 wages to 50 percent of wages properly allocable to domestic production gross receipts. This effectively creates a new requirement that the qualifying productive activity must employ workers. In a related Section 199 change, the special limit on wages treated as allocated to partners or shareholders of pass-through entities is repealed (this formerly limited pass-through wages to twice the 3 percent production deduction). This allows wages from one pass-through entity with qualifying production to be used by its owners to meet the wage test on other pass-through or proprietorship activity income, and is also effective for tax years beginning after May 17, 2006.

New Reporting of Tax-Exempt Interest Earnings
Interest paid on tax-exempt bonds after December 31, 2005 will be subject to information reporting requirements. Tax-exempt interest will now be reported on Form 1099 or similar documents.

"Kiddie Tax" Expanded
There could be significant increases in the tax rates for children ages 14 to 17. For many years, children under age 14 have been taxed at their parent's tax rate for most unearned income. Beginning with the 2006 tax year, the age for this "kiddie tax" provision increases from under 14 to under 18. The "kiddie tax" now applies if the child has not attained age 18 by the close of the tax year. The amendment does not apply to certain qualified disability trusts or for a child who is married and files a joint return.

Roth and Roll for the Movers and Shakers
For the first time, upper income taxpayers will be permitted to fund Roth accounts with rollover contributions. Beginning with the 2010 tax year, the $100,000 modified adjusted gross income limit and corresponding early withdrawal penalty has been eliminated on conversions of traditional IRAs to Roth IRAs.The rollover amount is still included in income.

Withholding Added for Government Payments
After 2010, income tax will be withheld at a rate of 3 percent from government payments for property and services. This covers nearly all payments to suppliers from federal, state, or local governments.

Partial Payments Required for Offers in Compromise
A partial tax payment must accompany any offer-in-compromise that is submitted to the IRS, effective for tax settlement offers submitted on or after July 6, 2006.