The following new rules apply to postponing gain on the sale or exchange of livestock (other than poultry) held for draft, breeding, or dairy purposes because of weather-related conditions. These rules are effective for tax years for which the return due date (excluding extensions) is after 2002.

If you do not replace the livestock, the due date for making an election to postpone reporting income from sales or exchanges because of weather-related conditions described in item (2) above is also extended.

For more information, see Publication 225, Farmer's Tax Guide.

Generally, you can deduct only 50% of your business-related meal expenses. You can deduct a higher percentage for meal expenses while traveling away from your tax home for business purposes if the meals take place during or incident to any period subject to the Department of Transportation's “hours of service” limits. (These limits apply to workers who are under certain federal regulations.) The percentage increases to 70% for 2004. Business meal expenses are covered in chapter 1 of Publication 463, Travel, Entertainment, Gift, and Car Expenses. Reimbursements for employee meal expenses are covered in chapter 13 of Publication 535, Business Expenses.

You can treat cash contributions made in January 2005 for the relief of victims in areas affected by the December 26, 2004, Indian Ocean tsunami as if you had made them on December 31, 2004. These contributions must otherwise qualify as deductible contributions. Contributions you deduct on your 2004 tax return cannot be deducted on your 2005 tax return.

If you donate a patent or other intellectual property to a qualified organization after June 3, 2004, your deduction is limited to the basis of the property or the fair market value of the property, whichever is less. Intellectual property means any of the following:

The additional deductions cannot be taken for patents or other intellectual property donated to certain private foundations.

All corporations generally must get a qualified appraisal of property donated after June 3, 2004, if claiming a deduction of more than $5,000. This does not apply to contributions of cash, inventory, publicly traded stock, intellectual property, or certain qualified vehicles for which a written statement from the donee organization is provided. Previously, most C corporations were not required to get an appraisal.

If a deduction of more than $500,000 is claimed, the appraisal must be attached to the corporation's return.

If the corporation does not meet these requirements, it cannot deduct the contribution, unless its failure to meet the requirements is due to reasonable cause and not to willful neglect.

The increased deduction for donations of qualified contributions of computer technology or equipment by a corporation to an eligible donee was scheduled to expire for tax years beginning after 2003. This provision is extended to contributions made during any tax year beginning before January 1, 2006.

For productions beginning after October 22, 2004, you can elect to deduct up to $15 million in production costs of a qualified film or television production. The aggregate costs of such a production cannot exceed $15 million. No other depreciation or amortization is allowed for a production for which you make the election. This deduction is increased to $20 million for a production if the costs are significantly incurred in certain economically depressed areas.

For business start-up costs and organizational costs of corporations and partnerships paid or incurred after October 22, 2004, you can elect to deduct up to $5,000. This amount is reduced by the amount by which your start-up costs exceed $50,000. Also, the amortization period for certain business start-up costs and organizational costs paid or incurred after October 22, 2004, has been increased to 15 years. For details, see Publication 535, Business Expenses.

The maximum section 179 expense deduction for sport utility vehicles and certain other vehicles placed in service after October 22, 2004, is $25,000. For more information, see chapter 5 of Publication 946, How To Depreciate Property.

Certain non-commercial aircraft placed into service before January 1, 2006, may be eligible for the special depreciation allowance. For more information, see Publication 946, How To Depreciate Property.

You can elect not to treat qualified New York Liberty Zone leasehold improvement property as 5-year property. If you make this election, depreciate the property using the rules for nonresidential real property if placed in service before October 23, 2004, and using the rules for qualified leasehold improvement property if placed in service after October 22, 2004. For more information, see Publication 946, How To Depreciate Property.

For purposes of meeting the placed in service rule for the special depreciation allowance, multiple units of property sold after June 4, 2004, that are subject to the same lease generally will qualify as placed in service on the date of sale if sold within 3 months after the final unit is placed in service. For more information and other rules for leases subject to syndication, see Publication 946, How To Depreciate Property.

Qualified leasehold improvement property and qualified restaurant property placed in service after October 22, 2004, and before January 1, 2006, is 15-year property under MACRS. You must use the straight line method over a 15-year recovery period (39 years if the alternative depreciation system (ADS) is elected or otherwise applies). For more information, see Publication 946, How To Depreciate Property.

For depreciation purposes, the useful life of computer software leased under a lease agreement entered into after March 12, 2004, to a tax-exempt organization, governmental unit, or a foreign person or entity (other than a partnership), cannot be less than 125 percent of the lease term. For more information about depreciating computer software, see Publication 946, How To Depreciate Property.

New guidance has been issued for depreciating property acquired after February 27, 2004, in a like-kind exchange or involuntary conversion. You generally must depreciate the carryover basis of the acquired property over the remaining recovery period of the property exchanged or involuntarily converted. You also generally continue to use the same depreciation method and convention used for the exchanged or involuntarily converted property. The excess basis, if any, of the acquired property is treated as newly placed in service property.

For a like-kind exchange or involuntary conversion for which the date of disposition, replacement, or both was before February 28, 2004, you may follow these rules or rely on prior IRS guidance using any reasonable, consistent method of figuring depreciation.

For more information and special rules, see Publication 946.

A small business refiner can now elect to expense, rather than depreciate, 75% of qualifying costs of complying with Environmental Protection Agency (EPA) sulfur regulations. A reduced expense deduction is allowed for larger businesses. For more information, see section 179B of the Internal Revenue Code.

You can elect to deduct up to $10,000 of qualifying reforestation costs paid or incurred after October 22, 2004. The remaining costs can be amortized over an 84-month period. For more information about this deduction, see Publication 535, Business Expenses. The reforestation credit is no longer available for costs paid or incurred after October 22, 2004.

For tax years beginning in 2004 and 2005, percentage depletion on the marginal production of oil or natural gas by independent producers and royalty owners is not limited to taxable income from the property figured without the depletion deduction. For more information, see Publication 535, Business Expenses.

The deduction for qualified environmental cleanup costs was scheduled to expire for costs paid or incurred after December 31, 2003. This provision is extended to include costs you pay or incur before January 1, 2006. For more information about this deduction, see Publication 535, Business Expenses.

The deduction for certain travel, meals, and entertainment expenses incurred after October 22, 2004, is limited to the amount treated as compensation to officers, directors, or more-than-10% shareholders. For more information, see section 274(e)(2) of the Internal Revenue Code.

If you are a fisherman, you can elect to use Schedule J to figure your 2004 tax by averaging, over the previous 3 years, all or part of your 2004 taxable income from your trade or business of fishing. Making this election may give you a lower tax if your 2004 income from fishing is high and your taxable income for one or more of the 3 prior years was low. Also, the benefit of income averaging is extended to farmers and fishermen who owe the alternative minimum tax. For more information, see the 2004 Instructions for Schedule J, Income Averaging for Farmers and Fishermen.

For tax years beginning after October 22, 2004, a corporation's gross income does not include income from qualifying shipping activities if the corporation elects to be taxed on its notional shipping income at the highest corporate tax rate (35%). See the Instructions for Forms 1120 and 1120A for more information.

A new general business credit for the production of low sulfur diesel fuel is now available. It can be claimed retroactively for expenses paid or incurred after December 31, 2002. For more information, see Form 8896, Low Sulfur Diesel Fuel Production Credit.

For tax years beginning after October 22, 2004, the number of qualified energy resources for purposes of this credit has been expanded. See Form 8835, Renewable Electricity and Refined Coal Production Credit, for more information.

The credit for increasing research activities has been extended to include research expenditures paid or incurred prior to January 1, 2006. For more information on claiming the credit, see Form 6765, Credit for Increasing Research Activities.

The work opportunity credit and the welfare-to-work credit have been extended, subject to certain limitations. The credits, available to employers for part of the wages paid to certain employees, are available for employees beginning work prior to January 1, 2006. For more information, see Publication 954, Tax Incentives for Distressed Communities.

The self-employment tax rate on net earnings remains the same for 2004. 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 2004 increases to $87,900. All net earnings of at least $400 are subject to the Medicare part.

A taxpayer other than a corporation generally can exclude up to 50% of a gain on the sale or trade of qualified small business stock held more than 5 years. This is called the section 1202 exclusion. Beginning in 2005, the exclusion is increased to as much as 60% of your gain if you meet the following additional requirements.

Item (1) will still be met if the corporation ceased to qualify after the 5-year period that begins on the date you acquired the stock. However, the gain that qualifies for the 60% exclusion cannot be more than the gain you would have had if you had sold the stock on the date the corporation ceased to qualify.

The part of the gain that is included in income is 28% rate gain. See Capital Gain Tax Rates in chapter 4 of Publication 550, Investment Income and Expenses.

For more information about the section 1202 exclusion, see Section 1202 Exclusion in chapter 4 of Publication 550. For more information about empowerment zone businesses, see Publication 954, Tax Incentives for Distressed Communities.

Outright sales of timber by landowners after December 31, 2004, will qualify for capital gains treatment if the timber was held for more than 1 year before the date of disposal. The new rules extending capital gains treatment for outright sales of timber are similar to certain disposals of timber under a contract with a retained economic interest. However, for outright sales, the date of disposal is not deemed to be the date timber is cut; the owner may elect to treat the payment date as the date of disposal. For more information on dispositions of timber, see Publication 544, Sales and Other Dispositions of Assets.

For tax years beginning in 2005, you can deduct 3% of the smaller of:

The deduction does not apply to income derived from the sale of food and beverages you prepare at a retail establishment; property you leased, licensed, or rented for use by any related person; or the transmission or distribution of electricity, natural gas, or potable water.

For tax years beginning after December 31, 2004, the number of shareholders that an S corporation may have increases from 75 to 100.

For purposes of the 100 shareholder limit, members of a family may elect to be treated as one shareholder. The election may be made by any family member. A family is defined as the common ancestor, the lineal descendants of the common ancestor, and the spouses (or former spouses) of the lineal descendants or the common ancestor.

For payments made after 2004, the flat withholding rate on supplemental wage payments that exceed $1,000,000 during the year is increased to to 35%. See section 7 of Publication 15 (Circular E), Employer's Tax Guide, for more information.

Wages for social security, Medicare, and federal unemployment tax purposes do not include remuneration from exercising an incentive stock option or an employee stock purchase plan option after October 22, 2004, or from any disposition of stock acquired by exercising such an option. Federal income tax withholding is not required on income from a disqualifying disposition of stock acquired by exercising an incentive stock option or an employee stock purchase plan option after October 22, 2004, or on income from any disposition of stock acquired by exercising an employee stock purchase plan option after October 22, 2004, equal to the discount portion of stock acquired by exercising the option. See section 2 of Publication 15-B, Employer's Tax Guide to Fringe Benefits, for more information.

The self-employment tax rate on net earnings remains the same for 2005. 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 2005 has increased to $90,000. All net earnings of at least $400 are subject to the Medicare part.

The deposit threshold for FUTA tax has been increased from $100 to $500. The $500 threshold applies to FUTA tax deposits required for taxes reported on Form 940, 940-EZ, and 940-PR, Employer's Annual Federal Unemployment (FUTA) Tax Return, for tax periods beginning after December 31, 2004.