Tax Changes for Business
2001 Changes

Cash Method of Accounting

For tax years ending on or after December 31, 2001, a qualifying small business taxpayer can choose to use the cash method of accounting and not account for inventories. A qualifying small business taxpayer is any taxpayer with average annual gross receipts of more than $1,000,000 but less than or equal to $10,000,000 that is not prohibited from using the cash method of accounting under section 448 of the Internal Revenue Code. Certain other requirements must be met. For more information, see Notice 2001– 76 in Internal Revenue Bulletin 2001– 52. These rules do not apply to taxpayers with average annual gross receipts of $1,000,000 or less. They can use the cash method of accounting under Revenue Procedure 2001– 10, which is discussed in Publication 538, Accounting Periods and Methods.

Election Out of Installment Method

For sales occurring after December 16, 1999, accrual basis taxpayers were required to report installment sales under the accrual method of accounting. The Installment Tax Correction Act of December 28, 2000, repealed that requirement.

If you entered into an installment sale after December 16, 1999, and filed an income tax return by April 16, 2001, reporting the sale on an accrual method, you have IRS approval to revoke your effective election out of the installment method.

To revoke the election, you must file an amended return for the year of the installment sale (and any other year affected by the sale), reporting the gain on the installment method. You generally have 3 years from the due date of the original return to file an amended return.

For more information on installment sales, see Publication 537, Installment Sales.

Standard Mileage Rate

For 2001, the standard mileage rate for the cost of operating your car, 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.

Postponed Tax Deadlines

The IRS may postpone for up to 1 year certain tax deadlines of taxpayers who are affected by a Presidentially declared disaster or terrorist attack. The tax deadlines the IRS may postpone include those for filing income and employment tax returns, paying income and employment taxes, and making contributions to a traditional IRA or Roth IRA.

If any tax deadline is postponed, the IRS will publicize the postponement in your area and publish a news release, revenue ruling, revenue procedure, notice, announcement, or other guidance in the Internal Revenue Bulletin (IRB).

Redesignation of Estimated Tax Payments

As a result of the economic disruptions caused by the September 11, 2001, terrorist attacks, some taxpayers believe their tax liability for the current year will be lower than the total of the estimated tax payments they have already made.

The IRS will allow these taxpayers to redesignate their estimated tax payments as deposits of employment taxes and income taxes withheld. To redesignate estimated tax payments, a taxpayer should contact the IRS through its Disaster Relief toll-free number, 1– 866– 562– 5227.

If, as a result of the redesignation, the amount of the estimated tax payments is reduced below the amount required to pay the estimated tax obligation, the taxpayer may be liable for an underpayment penalty.

Lower Capital Gain Tax Rates

Beginning in 2001, the 10% capital gain rate is lowered to 8% for 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. 18% rate. 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 property held on January 1, 2001. A taxpayer (other than a corporation) who on
January 1, 2001, held certain capital assets or property used in a trade or business can elect to treat the property as sold and then reacquired on that date. The purpose of the election is to make any future gain on the property eligible for the 18% rate by giving the property a new holding period. Any gain on the deemed sale must be recognized. However, any loss is not allowed.

For more information on this election, see chapter 4 of Publication 550, Investment Income and Expenses.

Rollover of Gain From Sale of Empowerment Zone Assets

You can choose to roll over certain gains from the sale of qualified empowerment zone assets purchased after December 21, 2000, if you meet all the following tests.

• You hold a qualified empowerment zone asset for more than 1 year and sell it at a gain.
• Your gain from the sale is a capital gain.
• During the 60-day period beginning on the date of the sale, you buy a replacement qualified empowerment zone asset in the same zone as the asset sold.

For more information about the rollover of gain from the sale of empowerment zone assets, see Publication 954, Tax Incentives for Empowerment Zones and Other Distressed Communities.

Depreciation and Section 179 Deduction Increased section 179 deduction. The total cost of section 179 property that you can elect to deduct is increased from $20,000 to $24,000 for 2001 and 2002. Beginning in 2003, the total amount you can elect to deduct under section 179 will increase to $25,000.

For more information on the section 179 deduction, see chapter 2 in Publication 946, How To Depreciate Property.

Election not to apply the mid-quarter convention under MACRS. If you file your 2001 return on a calendar year basis, or on a fiscal year basis or for a short tax year and the third or fourth quarter of your 2001 tax year includes September 11, 2001, you can elect to apply the half-year convention to all property placed in service during the year that would otherwise be subject to the mid-quarter convention under MACRS. See Which Convention Applies? and Using the Applicable Convention in a Short Tax Year in chapter 3 of Publication 946, How To Depreciate Property.

Self-Employment Tax

The self-employment tax rate on net earnings remains the same for 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.

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