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 optional standard mileage rate. The standard mileage rate for the cost of operating your passenger car, including a van, pickup, or panel truck, in 1999 is 32 1/2 cents a mile for all business miles driven before April 1. The rate is 31 cents a mile for business miles driven after March 31.

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

Production Flexibility Contract Payments

Under the cash method of accounting, you include all items of income you actually or constructively received during the year in gross income for that year. You constructively receive income when it is credited to your account or made available to you. You do not need to have physical possession of it. However, if you are a farmer receiving production flexibility payments under the Federal Agriculture Improvement and Reform Act of 1996, you are not considered to constructively receive a payment merely because you have the option to receive it in the year before it is required to be paid. You disregard that option in determining when to include the payment in your income. This rule applies to any farm production flexibility payment made under the 1996 Act as in effect on December 17, 1999.

Business Use of Your Home

New rules make it easier to claim a deduction for the business use of your home. Under the new rules, you may qualify to claim the deduction, even if you never qualified before.

Beginning in 1999, it is easier for your home office to qualify as your principal place of business. Your home office will qualify as your principal place of business for deducting expenses for its use if you meet the following requirements.

• You use it exclusively and regularly for administrative or management activities of your trade or business.
• You have no other fixed location where you conduct substantial administrative or management activities of your trade or business.

For more information on the definition of principal place of business and the other tests you must meet to qualify to deduct expenses for the business use of your home, see Publication 587, Business Use of Your Home (Including Use by Day-Care Providers).

Depreciation and Section 179 Deduction

Depreciation limits on business cars. The total section 179 deduction and depreciation you can take on a car (that is not a clean-fuel car) you use in your business and first place in service in 1999 cannot exceed $3,060. Your depreciation cannot exceed $5,000 for the second year, $2,950 for the third year, and $1,775 for each later year.

For information on the increased limits for clean-fuel cars, see chapter 4 in Publication 946, How To Depreciate Property.

Increases to section 179 deduction. The total cost of section 179 property that you can elect to deduct is increased from $18,500 for 1998 to $19,000 for 1999. For tax years after 1999, this amount increases as shown below.

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

Election under GDS to use 150% DB Rate. For 3-, 5-, 7-, and 10-year class property you placed in service before 1999 and chose to depreciate using the 150% declining balance (DB) rate, you had to use an ADS (Alternative Depreciation System) recovery period. If you place similar property in service after 1998 and choose to depreciate it using the 150% DB rate, you can use the same (GDS-General Depreciation System) recovery period you would use if you chose the 200% DB rate.

For more information, see Property Classes and Recovery Periods in chapter 3 of Publication 946.

Marginal Production of Oil and Gas

The suspension of the taxable income limit on percentage depletion from the marginal production of oil and natural gas has been extended to tax years beginning after 1999 and before January 1, 2002. Previously, the suspension was for tax years beginning after 1997 and before January 1, 2000. For more information on marginal production, see section 613A(c)(6) of the Internal Revenue Code.

Health Insurance Deduction for the Self-Employed

For 1999, this deduction increases to 60% of the amount you paid for medical insurance for yourself and your family. After 2001, the deduction will increase again. For more information, see chapter 10 in Publication 535, Business Expenses.

Self-Employment Tax

The self-employment tax rate on net earnings remains the same for calendar year 1999. 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 1999 has increased to $72,600. All net earnings of at least $400 are subject to the Medicare part.

General Business Credit

The following items explain changes to several components of the general business credit. For more information about the general business credit, see chapter 4 in Publication 334, Tax Guide for Small Business.

Research credit. The research credit was scheduled to expire for expenses paid or incurred after June 30, 1999. It has been extended for 5 years to include expenses paid or incurred through June 30, 2004. It has also been expanded to cover expenses paid or incurred after June 30, 1999, for research conducted in Puerto Rico and U.S. possessions.

Work opportunity credit. The work opportunity credit was scheduled to expire for wages paid to qualified individuals who began work for you after June 30, 1999. It has been extended to include wages paid to qualified individuals who begin work for you before January 1, 2002.

Welfare-to-work credit. The welfare-to-work credit was scheduled to expire for wages paid to qualified individuals who began work for you after June 30, 1999. It has been extended to include wages paid to qualified individuals who begin work for you before January 1, 2002.

Depreciation Recovery Period for Alternative Minimum Tax (AMT)

For property placed in service after 1998, use the same recovery period you use to figure your depreciation for regular tax purposes to figure any AMT adjustment.

Gains from Certain Constructive Ownership Transactions

If you have a gain from a constructive ownership transaction entered into after July 11, 1999, involving a financial asset (discussed later) and the gain normally would be treated as a long-term capital gain, all or part of the gain may be treated instead as ordinary income. In addition, if any gain is treated as ordinary income, your tax is increased by an interest charge.

Constructive ownership transactions. The following are constructive ownership transactions.

1. A notional principal contract in which you have the right to receive substantially all of the investment yield on a financial asset and you are obligated to reimburse substantially all of any decline in value of the financial asset.
2. A forward or futures contract to acquire a financial asset.
3. The holding of a call option and writing of a put option on a financial asset at substantially the same strike price and maturity date.

This provision does not apply if all the positions are marked to market. Marked to market rules for section 1256 contracts are discussed in detail in chapter 4 of Publication 550, Investment Income and Expenses.

Financial asset. A financial asset, for this purpose, is any equity interest in a pass-through entity. Pass-through entities include partnerships, S corporations, trusts, regulated investment companies, and real estate investment trusts.

Amount of ordinary income. Long-term capital gain is treated as ordinary income to the extent it is more than the net underlying long-term capital gain. The net underlying long-term capital gain is the amount of net capital gain you would have realized if you acquired the asset for its fair market value on the date the constructive ownership transaction was opened, and sold the asset for its fair market value on the date the transaction was closed. If you do not establish the amount of net underlying long-term capital gain by clear and convincing evidence, it is treated as zero.

More information. For more information, see section 1260 of the Internal Revenue Code.

Additions to Definition of Noncapital Assets

The definition of noncapital assets (assets that generally produce ordinary, rather than capital, gain or loss when sold) has been expanded to include the following categories of assets.

1. Certain commodities derivative financial instruments held, acquired, or entered into by commodities derivatives dealers (as defined later) after December 16, 1999.
2. Hedging transactions (as defined later) entered into after December 16, 1999. This applies only to a transaction clearly identified as a hedging transaction before the close of the day on which it was acquired, originated, or entered into.
3. Supplies of a type you regularly use or consume in the ordinary course of your trade or business, that you held or acquired after December 16, 1999.

Commodities derivative financial instruments. A commodities derivative financial instrument is a commodities contract or other financial instrument, with respect to commodities, for which the value or settlement price is calculated or determined by reference to a specified index (as defined in section 1221(b) of the Internal Revenue Code).

Commodities derivative dealer. A commodities derivative dealer is a person who regularly offers to enter into, assume, offset, assign, or terminate positions in commodities derivative financial instruments with customers in the ordinary course of a trade or business.

Hedging transactions. A hedging transaction is any transaction you enter into in the normal course of your trade or business primarily to manage one of the following.

1. Risk of price changes or currency fluctuations involving ordinary property held or to be held by you.
2. Risk of interest rate or price changes, or currency fluctuations, involving borrowed funds or ordinary obligations incurred or to be incurred by you.

More information. For details and exceptions, see section 1221 of the Internal Revenue Code.

Installment Method of Accounting

The following 1999 tax changes affect taxpayers who use the installment method of accounting.

Accrual Method Taxpayers

If you normally report income using an accrual method of accounting, you cannot use the installment method of accounting to report gain on sales or other dispositions of property occurring after December 16, 1999. However, this rule does not apply to sales or other dispositions of the following property.

• Property used or produced in the trade or business of farming.
• Timeshares or residential lots if you elect to pay a special interest charge. (For more information, see section 453(l) of the Internal Revenue Code.)

Cash basis taxpayers can still use the installment method of accounting to report gain on the sale or other disposition of property.

Pledge Rule

If you pledge an installment obligation as security for a loan, you must treat the proceeds of the loan as payment on the installment obligation and recognize the gain. This is called the pledge rule.

For sales or other dispositions occurring after December 16, 1999, if you have the right to transfer an installment obligation in payment of a loan, the loan is considered directly secured by the obligation and the pledge rule applies.

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

Electronic Deposits of Taxes

The threshold that determines whether you must deposit federal taxes electronically has been increased from $50,000 to $200,000. You must use the Electronic Federal Tax Payment System (EFTPS) to make electronic deposits of all tax deposit liabilities that occur after 1999 if you deposited more than $200,000 in federal deposit taxes in 1998. If you do not meet the $200,000 threshold, electronic deposits are voluntary, even if you were required to deposit electronically in the past.

In addition, the waiver of the penalty for failure to deposit taxes electronically has been extended for most taxpayers to deposit obligations incurred before January 1, 2000. This waiver was scheduled to expire on July 1, 1999. However, the waiver expired as scheduled on June 30, 1999, for taxpayers who deposited more than $200,000 in taxes in 1998.

For more information about depositing taxes electronically, see Publication 15, Circular E, Employer's Tax Guide, and Publication 966, The Easiest Way to Pay Your Federal Taxes.

Electronic Filing Delayed for Certain Partnerships

Partnerships with more than 100 partners are not required to file partnership returns electronically for tax years ending before December 31, 2000. However, calendar year domestic partnerships filing Form 1065 that have the capability to file their 1999 partnership tax returns electronically are encouraged to do so beginning on March 15, 2000.

Preparer Identification Number

Previously, a paid tax return preparer was required to disclose his or her social security number (SSN) on returns he or she prepared. Now, if you are a paid preparer and do not want to disclose your SSN on returns you prepare, you can use a preparer tax identification number (PTIN) instead. A PTIN cannot be used in place of the employer identification number of a tax preparation firm. Use Form W-7P, Application for Preparer Tax Identification Number, to apply for a PTIN. For more information on how to apply, see the instructions for Form W-7P.

OID List Now Available From IRS Website

The original issue discount (OID) list that appears at the end of Publication 1212, List of Original Issue Discount Instruments, is no longer available on the Martinsburg electronic bulletin board. You can now download it with the rest of Publication 1212 from the IRS website at www.irs.gov. Go to the Forms and Publications page and select Forms and Publications by Date or Forms and Publications by Number. Then select Publication 1212 from the list. Also, be sure to select "SGML Text."

For information on OID and the list of OID instruments, see Publication 1212.

Previous | First | Next

Publication 553 | 1999 Tax Year Archives | Tax Help Archives | Home