2001 Changes

Standard Mileage Rate

If you use your car in your business, you can figure your deduction for business use based on either your actual costs or the standard mileage rate. For 2001, the standard mileage rate for the cost of operating your car, including a van, pickup, or panel truck, is increased to 34 1/2 cents a mile for all business miles.

Car expenses and use of the standard mileage rate are explained in chapter 4 of Publication 463, Travel, Entertainment, Gift, and Car Expenses.

Lower Capital Gain Tax Rates

After 2000, there will be changes in the capital gain tax rates. The changed rates apply to gain that is "qualified 5-year gain." Qualified 5-year gain is long-term capital gain from the sale of property that you held for more than 5 years and that would otherwise be subject to the 10% or 20% capital gain rate.

2001. Beginning in 2001, the 10% capital gain rate will be lowered to 8% for qualified 5-year gain.

2006. Beginning in 2006, the 20% capital gain rate will be lowered to 18% for qualified 5-year gain from property with a holding period that begins after 2000.

Election to recognize gain on assets held on January 1, 2001. Taxpayers (other than corporations) can elect to treat certain assets held on January 1, 2001, as sold and then reacquired on the same date but they must pay tax for 2001 on any resulting gain. The purpose of the election is to make any future gain on the asset eligible for the 18% rate by giving the asset a new holding period.

You can make this election for either of the following types of assets:

• Readily tradable stock that is a capital asset that you held on January 1, 2001, and did not sell before January 2, 2001. If you make the election, you treat this stock as sold on January 2, 2001, at its closing market price on that date. You then treat it as reacquired on that date for the same amount.
• Any other capital asset or property used in a trade or business that you held on January 1, 2001. If you make the election, you treat this type of asset as sold on January 1, 2001, for its fair market value on that date. You then treat it as reacquired on that date for the same amount.

Any gain on a deemed sale resulting from this election must be recognized. However, any loss is not allowed.

For the election to apply, you cannot dispose of the asset (in a transaction in which gain or loss is recognized in whole or in part) within the 1-year period beginning on the date the asset would have been treated as sold under the election.

How to make the election. Report the deemed sale on your tax return for the tax year that includes the date of the deemed sale. If you are a calendar year taxpayer, this is your 2001 tax return. Attach a statement to the return stating that you are making an election under section 311 of the Taxpayer Relief Act of 1997 and specifying the assets for which you are making the election. Once made, the election is irrevocable.

Environmental Cleanup Cost Deduction

The deduction for qualified environmental cleanup costs was scheduled to expire for costs paid or incurred after December 31, 2001. It has been extended to include costs you pay or incur before January 1, 2004. For more information about this deduction, see Publication 954, Tax Incentives for Empowerment Zones and Other Distressed Communities.

Self-Employment Tax

The self-employment tax rate on net earnings remains the same for calendar year 2001. This rate, 15.3%, is a total of 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).

The maximum amount subject to the social security part for tax years beginning in 2001 has increased to $80,400. All net earnings of at least $400 are subject to the Medicare part.

Employment Taxes

Social security and Medicare taxes. For 2001, the employer and employee will continue to pay:

1. 6.2% each for social security tax (old-age, survivors, and disability insurance), and
2. 1.45% each for Medicare tax (hospital insurance).

Wage limit. For social security tax, the maximum amount of 2001 wages subject to the tax has increased to $80,400. For Medicare tax, all covered 2001 wages are subject to the tax. There is no wage base limit. For information about these taxes, see Publication 15, Circular E, Employer's Tax Guide.

Household employees. The $1,200 social security and Medicare wage threshold for household employees has been increased to $1,300 for 2001. This means that if you pay a household employee cash wages of less than $1,300 in 2001, you do not have to report and pay social security and Medicare taxes on that employee's 2001 wages. For more information on household employment taxes, see Publication 926, Household Employer's Tax Guide.

Deposit rules. Beginning in 2001, the threshold for depositing employment taxes increases from $1,000 to $2,500. If your tax liability is less than $2,500, you are not required to make deposits and you can pay the taxes with Form 941, Employer's Quarterly Federal Tax Return, or Form 943, Employer's Annual Tax Return for Agricultural Employees. For information on depositing employment taxes, see Publication 15, Circular E, Employer's Tax Guide, or Publication 51, Circular A, Agricultural Employer's Tax Guide.

New publication on fringe benefits. Publication 15-B, Employer's Tax Guide to Fringe Benefits (For Benefits Provided in 2001), supplements Publication 15, Circular E, Employer's Tax Guide, and Publication 15-A, Employer's Supplemental Tax Guide. It contains specialized and detailed information on the employment tax treatment of fringe benefits that was previously covered in chapters 3, 4, and 5 of Publication 535, Business Expenses.

When Publication 15-B (November 2000) was prepared for print, Congress was considering legislation that could have affected the amounts of pay used in that publication to define highly compensated employees, key employees, control employees, and qualified employees for 2001. Legislation was enacted, but it did not require a change in those amounts for 2001. The amounts of pay shown in Publication 15-B are the correct amounts for 2001.

Fringe benefit parking exclusion. You can generally exclude a limited amount of the value of qualified parking you provide to an employee from the employee's wages subject to employment taxes. In 2000, you could exclude up to $175 per month. For 2001, the maximum amount you can exclude is increased to $180 per month. For more information on this exclusion, see Transportation (Commuting) Benefits in Publication 15-B, Employer's Tax Guide to Fringe Benefits (For Benefits Provided in 2001).

Tax Incentives for Empowerment Zones and Renewal Communities

The Community Renewal Tax Relief Act of 2000 generally extends empowerment zone status for existing zones through 2009, provides new or enhanced tax benefits to businesses in empowerment zones, and authorizes up to nine new zones. The Act also authorizes up to 40 renewal communities in which businesses will be eligible for tax incentives such as a 15% credit on the first $10,000 of the wages of certain employees, special cost recovery for commercial revitalization expenses, an increased section 179 deduction, and paying no tax on any capital gain from the sale of certain qualifying assets. In addition, the Act creates a New Markets tax credit for equity investments in qualified community development entities. For more information, see Publication 954, Tax Incentives for Empowerment Zones and Other Distressed Communities. A new edition of Publication 954, reflecting the new law, will be available early in 2001.

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