By Rachel Pleasant
Staff Writer

It is late November, and you probably have things like Christmas presents and parties, family dinners and twinkling lights running through your mind.

But the tax season quickly follows the holiday season, and soon you will be searching for deductions rather than decorations.

For an introduction to major changes you—and your business—might encounter when filing your 2005 returns, the Charleston Regional Business Journal consulted local accountants Marcia Rhea of Chandler Rhea LLC CPA and Betsy Shaw of Pratt-Thomas & Gumb CPAs.

Time is money

In the wake of Hurricane Katrina, employees and businesses have a new option to help storm victims.

The IRS has approved a program that allows employees to donate their vacation, sick or personal leave.

After an employee agrees to donate a certain amount of time, the employer makes a cash donation equivalent to the hours donated.

The employer can deduct these “leave-sharing” donations as a business expense rather than having the deduction limited by the charitable contribution rules, and an employee’s adjusted gross income will be reduced to account for the donation. The less the AGI, the less that employee will pay in taxes, and it may increase other deductions and credits that come with high-income limits and phase-outs.

You make it; you deduct it

Tax years beginning on or after Jan. 1, 2005, will include a deduction for businesses that manufacture, produce, grow or extract a handful of items in the United States.

Those items include: tangible personal property, computer software, construction or substantial renovation of a property, engineering or architectural services performed in the United States for U.S. construction projects, sound and film recordings, electricity, natural gas and potable water.

The trick in getting this deduction is calculating it. The most basic method is to calculate how much of a company’s net income—or taxable income, if it’s less—was earned through producing those qualified items. Deductions are limited to 50% of W-2 wages reported by the business.

For 2005 and 2006, businesses may deduct 3% of their income; in 2007 and 2008, it will be 6%; in 2009 and thereafter, it will be 9%.

The idea behind this change, said Rhea, is to give U.S. companies a competitive edge.

If you build it, a tax credit will come

The federal government is rewarding builders who consider the impact a new home or a new building will have on the environment.

Contractors who build energy efficient homes are eligible for a new tax credit thanks to the Energy Tax Incentives Act of 2005.

The credit ranges from $1,000 to $2,000 per home, depending on the type of home and the energy reduction standards that the contractor meets. The credit applies to homes substantially completed by Dec. 31, 2005 and are purchased between Dec. 31 and Jan. 1, 2008.

There is also a deduction for energy-efficient commercial buildings that meet a 50% energy reduction standard. The deduction can range from 60 cents per square foot up to $1.80 per square foot. The deduction is effective for property placed in service between Dec. 31, 2005 and Jan. 1, 2008.

Other things to keep in mind

• The IRS is requiring that corporations with assets worth more than $10 million file Schedule M-3, which is designed to create more transparency between taxable income and financial accounting income, providing the IRS with information that will help identify potentially abusive transactions.

This change only applies to those companies that file form 1120. Companies that file an 1120 must file a consolidated schedule M-3 as well as a schedule M-3 for the parent, subsidiaries and any elimination.

• If you have bought a hybrid or electric car, or if you’re thinking about it, the IRS has created a deduction that might interest you.

Those who have purchased a hybrid, or clean-fuel, car are eligible for a deduction of $2,000 if the car was placed in service in 2005. There is also a smaller deduction available if the car is placed in service in 2006, but there is no deduction if placed in service in 2007.

“(The federal government) is trying to spur some interest in these vehicles,” Rhea said.

There is also a credit, worth 10% of the purchase amount up to $4,000, available for those who purchased electric cars. The credit will phase out over time with the maximum credit after 2005 pegged at $1,000.

• Speaking of cars, if you have donated a vehicle, including automobiles, trucks and boats, to a charity, there is a slight but important change to note for 2005. Deductions will be limited to the fair market value of the car or the proceeds a charity receives if it sells the vehicle, whichever is less, Rhea said.

Previously, the deduction was simply made based on the fair market value.

Additional changes may be made to the tax code before the end of the year.

Rachel Pleasant is a staff writer for the Business Journal. E-mail her at rpleasant@charlestonbusiness.com.

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