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CCH can assist you with stories, including interviews with CCH subject experts.
Also, the 2005 CCH Whole Ball of Tax is available in print. Please contact:
Leslie Bonacum
(847) 267-7153
mediahelp@cch.com
Neil Allen
(847) 267-2179
allenn@cch.com
Link to special CCH Tax Briefings on key topics from 2004:
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2005 CCH Whole Ball of Tax
Hungry to be an Entrepreneur?
Now May be the Time to Open a Restaurant, Says CCH
(RIVERWOODS, ILL., January 2005) – If you’re among the thousands of entrepreneurs
each year looking to become your own boss, now may be your time – at least when
it comes to favorable tax treatment, thanks to changes in the tax law enacted
as part of the American Jobs Creation Act of 2004, according to CCH INCORPORATED
(CCH), a leading provider of tax and accounting information, software and services
(tax.cchgroup.com) and publisher
of CCH Toolkit™ Tax Guide 2005. Among the Act’s provisions impacting
small businesses are new start-up expense write-offs, more favorable expensing
and depreciation deductions, liberalized S corporation membership rules, and
new manufacturing deductions that apply to a broader class of manufacturers.
"Statistically speaking, it’s in the first few years that small
businesses have the highest failure rates. Tax law changes can’t guarantee a
business will survive the early years and go on to be a success, but they can
offer some relief as owners start to build their businesses. Favorable tax laws
can also lower barriers as they look for ways to expand their businesses,"
said Paul Gada, JD, LLM, CCH small business analyst and editor of CCH Toolkit
Tax Guide 2005.
Gada adds that before pursuing entrepreneurial dreams, small business owners
may want to first consult with their attorney and tax advisor.
Given that the new depreciation provisions provide special treatment for
restaurants and manufacturers, CCH shows how the new tax laws may apply to a
budding restaurant/food manufacturing business.
Deciding on a Business Formation
Sam and Christie decide to open a 100-seat Italian restaurant along with a
small food manufacturing operation where they’ll make all-natural sauces for
both the restaurant and packaged for retail and mail-order. This
husband-and-wife team wants to build their enterprise as an S corporation and
have their large, extended family involved as shareholders. Under the American
Jobs Creation Act of 2004 (AJCA), the number of shareholders in an S corp
expands from 75 to 100. It also treats all members of a family as one S corp
shareholder. As a result, Christie and Sam are able to include all their
children and their grandchildren as S corp shareholders, and count them all as
one shareholder towards the new 100-member shareholder limit.
"There are a number of business formations open to small businesses and
many factors that should go into the decision, but these new provisions are
likely to boost the already fast growth of S corps, particularly when business
owners are family members," said Gada.
Determining the Benefits of Taking the Start-up Expense
Sam and Christie begin preparing their business in January of 2005 and open
the doors of their restaurant and manufacturing site in the spring of 2005. They
incur $7,000 in start-up costs before opening. They decide they will expense the
maximum of $5,000 in 2005 and amortize the $2,000 over 15 years.
Historically, start-up expenses for a new business had to be amortized over
60 months, starting in the first month the business actually began to run. Under
the AJCA, new businesses now can elect to deduct up to $5,000 in start-up
expenses during the first year, for those costs incurred after October 22, 2004.
However, the trade-off is that they must use a 15-year amortization period in
deducting any additional start-up expenses in excess of $5,000.
Start-up costs include the costs for market and product research, site
selection, and fees for attorneys and other consultants needed in starting the
business. Expenditures such as real estate taxes or interest charges do not
qualify for start-up expensing but can be deducted when incurred. Incorporation
costs also are not eligible for start-up expensing, but can be deducted over the
applicable amortization period. Likewise, property that can be depreciated, such
as equipment, does not qualify.
"The accelerated expensing is really designed to provide relief to very
small businesses with relatively low start-up expenses," said Gada.
"For a larger organization that may incur expenses of more than a few
thousand dollars, the idea of immediately writing off $5,000 isn’t all that
attractive if they must use a 15-year, versus the traditional 60-month, schedule
to write off many more thousands of dollars."
Taking Advantage of Depreciation Rules for Leasehold Improvements
Sam and Christie select a site in their city’s downtown area. The building
had formally housed a bakery and card shop for more than a decade. Overall,
their restaurant will take up about two-thirds of the building, with the food
manufacturing business occupying the rest of the site. Their remodeling in early
2005 included new floors and fixtures, expansion of the kitchen area,
development of a special manufacturing area for the mail-order and retail sauces
and installation of new industrial grade appliances. Rather than the traditional
39-year depreciation period, they will be able to take advantage of the new
15-year recovery period. Additionally, both expenses from the restaurant and
manufacturing sides will be eligible for expensing under the extended small
business expensing rules.
Under the AJCA , businesses can now use a 15-year, straight-line depreciation
recovery period for qualified leasehold improvements to nonresidential real
property placed in service after October 22, 2004 but before January 1, 2006.
Previously, a "qualified" leasehold improvement had to be depreciated
using straight-line depreciation over a 39-year period. Qualified leasehold
improvements apply only to the interior of a building and must be placed into
service more than three years after the building was first placed into service.
Similarly, the new law also provides a 15-year recovery period for qualified
restaurant property placed in service after October 22, 2004 and before January
1, 2006.
Although there is some overlap between the two under certain circumstances,
the provision for qualified restaurant property is much broader in that it is
not limited to leasehold improvements or by other restrictions that apply to
qualified leasehold improvement property.
Additionally, the increased small business expensing perk, set to expire at
the end of 2005, has been extended through 2007. This benefit allows a small
business to expense up to $105,000 of new equipment in 2005 for investments up
to $420,000. The original first year expensing limit of $25,000 per year was
expanded to $100,000 for tax year 2003. The accelerated expensing option now
remains in effect through 2007 and is indexed for inflation.
"The extension of these rules means small business owners have more time
to realize tax-savings. They can take a measured approach to growth over several
years and still be eligible for the favorable tax treatment without potentially
over-extending themselves," said Gada.
Making the Most of the Manufacturers’ Deduction
While the restaurant portion of Sam’s and Christie’s business is able to
capitalize on special depreciation rules, the sauce manufacturing side of the
operation is able to take advantage of reduced corporate income tax rates.
This new deduction for manufacturers reduces the corporate income tax rate
for domestic manufacturing 3 percentage points for 2005 and 2006, rising to 6
percent for 2007 through 2009 before reaching 9 percent in 2010.
In addition, manufacturers are broadly defined to include construction
activities; engineering and architectural services; energy production; qualified
film or videotape production; and certain farming operations involved with the
processing of agricultural products.
"A manufacturing operation that supplies products on site for
consumption – for example, in a restaurant – as well as packages and
distributes for retail sale, can only take the deduction for the manufacturing
process for the packaged side," said Gada. "So, these dual types of
organizations need to track separately all of the income and expenses for both
operations."
More Information for Small Business Owners
CCH Toolkit Tax Guide 2005 is available in bookstores nationwide, by
phone at 800-248-3248 or online on the CCH Business Owner’s Toolkit
site (www.toolkit.cch.com).
The online site also offers additional information and software tools to help
you start, run and grow your home office or small business, including instant
access to federal and state information, calculators and forms.
About CCH INCORPORATED
CCH INCORPORATED (tax.cchgroup.com),
based in Riverwoods, Ill., is a leading provider of tax and accounting
information, software and services. It has served tax, accounting and business
professionals and their clients since 1913. CCH is a Wolters Kluwer company (www.wolterskluwer.com).
Wolters Kluwer is a leading multinational publisher and information services
company. The company’s core markets are spread across the health, tax,
accounting, corporate, financial services, legal and regulatory, and education
sectors. Wolters Kluwer has annual revenues (2003) of €3.4 billion, employs
approximately 18,750 people worldwide and maintains operations across Europe,
North America and Asia Pacific. Wolters Kluwer is headquartered in Amsterdam,
the Netherlands. Its depositary receipts of shares are quoted on the Euronext
Amsterdam (WKL) and are included in the AEX and Euronext 100 indices.
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