Summary of Business Tax Law Changes

Many of the tax breaks in recent tax-relief bills were designed to be phased in over a number of years. To help you determine how these tax laws affect your long-term plans, we'll explain the changes that come into effect through 2011.

Select a year to see what tax changes will affect that year's returns. We include changes that went into effect in 2007 because they affect returns filed in the Spring of 2008.

1. 2007
2. 2008
3. 2009
4. 2010
5. 2011

Starting in 2007

Increased Section 179 Expense Deduction. The maximum amount of equipment placed in service in 2007 that businesses can expense increases to $125,000. This $17,000 increase from 2006 was mandated by Congress. The annual investment limit increases to $500,000 for 2007, up from $420,000 the year before. Thus, you won't lose the benefit of expensing until you place more than $500,000 of assets in service in 2007. Qualifying purchases made in the Gulf Opportunity Zone are eligible for a $100,000 increase to $225,000, and the investment limitation increases $600,000 to $1,100,000 for these purchases.

Self-Employment Tax Contribution Base Increased. The maximum amount of self-employment income subject to Social Security taxes increases from $94,200 to $97,500. The self-employment tax rate remains 15.3 percent.

Social Security Tax Contribution Base Increased. The maximum amount of wages subject to Social Security tax increases from $94,200 to $97,500. The tax rate remains 7.65 percent on employers and employees.

Business Standard Mileage Rate Increased. The standard business mileage rate increased to 48.5 cents per mile from 44.5 cents per mile for miles driven for business. Remember that you can deduct the cost of parking and tolls in addition to the mileage allowance.

Tax-free Parking for Employees. Starting in 2007, firms can pay for $215 a month of parking tax free for employees, up $10 per month from 2006. The cap on tax-free transit passes rises to $110 a month for 2007, up from $105 in 2006.

Domestic Production Activities Deduction. Starting in 2007, this deduction increases to 6 percent of qualifying business net income from domestic production activities. This deduction applies to businesses engaged in construction, engineering, or architectural services; film production; or the lease, rental, or sale of equipment manufactured in the United States.

Starting in 2008

Self-Employment Tax Contribution Base Increased. The maximum amount of self-employment income subject to Social Security taxes increases to $102,000 in 2008, up from $97,500 in 2007. The self-employment tax rate remains 15.3 percent.

Social Security Tax Contribution Base Increased. The maximum amount of wages subject to Social Security tax increases to $102,000 in 2008, up from $97,500 in 2007. The tax rate remains 7.65 percent on employers and employees.

Business Standard Mileage Rate Rises. The standard business mileage rate increases to 50.5 cents per mile for miles driven in 2008 for business, up from 48.5 cents per mile in 2006. Remember that you can deduct the cost of parking and tolls in addition to the mileage allowance.

Tax-free Parking for Employees. Starting in 2008, firms can pay for $220 a month of parking tax free for employees, up $5 per month from 2007. The cap on tax-free transit passes rises to $115 a month, up $5 a month from 2007.

Increased Section 179 Expense Deduction. The maximum amount of equipment placed in service in 2007 that businesses can expense increases to $128,000, a $3,000 increase from 2007. The annual investment limit increases to $510,000 for 2008, up from $500,000 the year before. Thus, you won't lose the benefit of expensing until you place more than $510,000 of assets in service in 2007.

The R&D Tax Credit. The credit for increasing spending on research and development expired after 2007. We expect Congress to reinstate the popular tax credit in 2008, retroactive to the beginning of the year.

Starting in 2009

Energy-saving Improvements to Commercial Real Estate. The special expensing allowed for the cost of energy-saving improvements to commercial buildings is not available after 2008.

Tax Credit for Energy-efficient Homes. The special credit for builders selling energy-efficient homes expires after 2008.

Solar Heating Credit. The 30 percent tax credit for businesses on the cost of solar heating units and fuel cells falls to 10 percent for those that are placed in service after 2008.

Starting in 2010

Domestic Production Activities Deduction. Starting in 2010, this deduction increases to 9 percent of qualifying business net income from domestic production activities. This deduction applies to businesses engaged in construction, engineering, or architectural services; film production; or the lease, rental, or sale of equipment manufactured in the United States.

Starting in 2011

Decreased Section 179 Expense Deduction. The maximum amount of newly purchased assets that a business is allowed to expense decreases to $25,000, and the annual investment limit drops to $100,000.

Withholding on Government Contracts. Starting in 2011, amounts paid out under government contracts will be subject to 3% tax withholding. This will affect contracts with the federal government, state governments and any municipality that pays out $100 million or more on contracts a year. Interest and payments for real estate are exempted.

Updated for tax year 2007