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On May 17, 2006, President Bush signed the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA).  This act extends a variety of different tax breaks, expands the kiddie tax to age 18 and temporarily protects some middle-income Americans from the alternative minimum tax (AMT).

The following is a brief summary of certain key provisions of TIPRA.

Section 179 Expensing: Under current law, the IRS allows many businesses to take a first year depreciation write off of the full cost of most equipment additions.  This deduction is known as Section 179 expensing.  For tax years beginning in 2006, the maximum Section 179 deduction is $108,000.  This limit is decreased dollar for dollar for asset additions exceeding $430,000.

The current law was due to sunset at the end of 2007, but TIPRA has extended the effective date until December 31, 2009.  Therefore, for tax years beginning in 2010, the Sec. 179 limits are due to drop back to a $25,000 expensing limit with a $200,000 phase out.

Those of you in the Gulf Opportunity Zone should keep in mind that the maximum Sec. 179 expense allowance is increased by $100,000 for qualified Katrina GO Zone property placed in service during the tax year.  Additionally, the phase-out limitation increases by up to $600,000.  These increases are in effect from August 28, 2005 through the end of 2008.

Extension of the 15% rate:  Current law taxes qualified dividends and most long-term capital gains at a rate of 15%.  This provision was set to expire at the end of 2008.  TIPRA has extended this beneficial tax rate for an extra two years through 2010.

Conversion to a Roth IRA:  Under current law, an individual with modified adjusted gross income above $100,000 cannot convert a traditional IRA into a Roth IRA.  The new law eliminates this limitation, but you’ll have to wait a while before you can take advantage of this.  The new provision won’t become effective until the year 2010.

This type of rollover requires the owner of the account to pay income tax on the transferred funds but allows the owner of the new Roth IRA to avoid income tax on all future income and appreciation in the account.

A Fix for the Alternative Minimum Tax (AMT):  TIPRA gives a one year increase to the AMT exemption by raising it to $62,550 for married couples filing jointly and $42,500 for single filers - for the year 2006 only.

In addition, some credits, including the dependent care credit, the credit for the elderly and disabled, the credit for interest on certain home mortgages, as well as the Hope and Lifetime learning credits for college expenses, can now be claimed against the AMT, thus offsetting both regular and AMT tax liability.

Changes to the “Kiddie Tax”:  Previously, only children under the age of 14 were taxed on unearned income at their parents’ tax rate.  In an attempt to raise revenue and prevent income shifting within families, Congress has changed the rules yet again.  Under TIPRA, the age threshold is now 18 years, and this change is retroactive to the beginning of 2006.  The child is still entitled to $850 of tax-free income in 2006, and the next $850 is taxed at the child’s rate before the “kiddie tax” applies.

Here are some other issues to continue to be aware of.

50% Bonus Depreciation:  50% bonus depreciation for qualified Katrina GO Zone property continues through 2007 (2008 for real property).  This write-off applies to the cost of most new property investments made in the Katrina GO Zone, including purchased computer software, machinery and equipment, leasehold improvements, and certain commercial and residential rental real estate expenses.  For property qualifying for the first-year write-off, all depreciation (including the bonus amount) is exempt from the Alternative Minimum Tax.

Net Operating Loss (NOL) Carryback:  If your business suffers a net operating loss in 2006, you generally may apply those losses against taxable income going back two years.  However, an NOL generated in the GO Zone is eligible for a special five year carryback period instead.  The GO Zone NOL is limited to the aggregate amount of: qualified GO Zone casualty losses, certain moving expenses, certain temporary housing expenses, depreciation deductions for qualified GO Zone property for the tax year the property is placed in service, and deductions for certain repair expenses resulting from Hurricane Katrina.  The five year carryback applies only for losses paid or incurred after August 27, 2005 and before January 1, 2008.

The above is merely a summary of the provisions.  A tax professional should be consulted for more details relating to these provisions.

Laura E. Monroe is a Certified Public Accountant and the managing partner of the tax division of Hannis T. Bourgeois. LLP.  She has a specialization in the construction industry and has 23 years of experience in public accounting.  She can be reached at lmonroe@htbcpa.com or (225) 928-4770.