Tax Changes for Business
2002 Changes

Standard Mileage Rate

For 2002, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck is increased to 36 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.

Social Security and Medicare Taxes

For 2002, the employer and employee will continue to pay:
1) 6.2% each for social security tax (old-age, survivors, and disability insurance), and
2) 1.45% each for Medicare tax (hospital insurance).

Wage limits. For social security tax, the maximum amount of 2002 wages subject to the tax has increased to $84,900. For Medicare tax, all covered 2002 wages are to the tax. For information about these taxes, see Publication 15, Circular E, Employer’s Tax Guide.

Meals While Subject to “Hours of Service” Limits

For 2002, you can deduct 65% of the reimbursed meals your employees consume while away from their tax home on business during, or incident to, any period subject to the Department of Transportation’s “hours of service” limits. For more information, see chapter 13 in Publication 535, Business Expenses.

Self-Employed Health Insurance Deduction

For 2002, this deduction increases to 70% of the amount paid for medical and qualified long-term care insurance for you and your family. After 2002, the deduction will increase to 100%. For more information, see chapter 7 in Publication 535, Business Expenses.

General Business Credits

For tax years beginning after 2001, there are two new business credits.

Credit for Employer-Provided Child Care

You can receive a tax credit of 25% of the qualified expenses you paid for employee child care and 10% of qualified expenses you paid for child care resource and referral services. This credit cannot be more than $150,000 each year.

Qualified child care expenses. Expenses that qualify for this credit include the following.

• Expenses to acquire, construct, rehabilitate, or expand depreciable property for use as a qualified child care facility. This property cannot be part of your or your employee’s main home.
• Expenses to operate a qualified child care facility. Include the costs related to training employees, scholarship programs, and any increased compensation to employees with higher levels of child care training.
• Expenses paid to a qualified child care facility under contract to provide child care services to your employees.

Qualified child care expenses do not include expenses in excess of the fair market value of the care.

Qualified child care facility. A qualified child care facility is a facility that:

• Is used mainly to provide child care assistance,
• Has enrollment open to your employees,
• Has as it's enrollees at least 30% of your employees’ dependents, if the facility is your main trade or business,
• Does not discriminate in favor of your highly compensated employees, and
• Meets the requirements of all applicable laws and regulations, including the licensing of the facility as a child care facility.

Basis reduced. If you take a credit for expenses to acquire, construct, rehabilitate or expand a facility, you must reduce your basis in the facility by the amount of that credit.

Qualified child care resource and referral expenses.

These expenses are amounts you paid or incurred under contract to provide child care resource and referral services to your employees. You cannot claim the credit on these expenses if the services offered discriminate in favor of your highly compensated employees.

Credit for Pension Plan Startup Costs

If you are an eligible employer who begins a new pension plan for your employees, you may be able to receive a tax credit of 50% of the first $1,000 of qualified startup costs of the plan. The credit is available for each of the first 3 years of the plan.

Eligible employer. You are an eligible employer if, during the preceding year, you had 100 or fewer employees who received at least $5,000 of compensation.

Qualified startup costs. Qualified startup costs are any ordinary and necessary expenses you pay to:

• Begin or administer an eligible employer plan, or
• Educate your employees about the plan.

Eligible employer plan. An eligible employer plan is a plan that meets the requirements of a defined benefit or defined contribution plan (including a 401(k) plan), SIMPLE plan, or simplified employee pension.

Work Opportunity Credit and Welfare-to-Work Credit

The work opportunity credit and the welfare-to-work credit are scheduled to expire for wages paid to individuals who began working for you after 2001.

Electric and Clean-Fuel Vehicles

maximum clean-fuel vehicle deduction and qualified electric vehicle credit are 25% lower for 2002 than they were for 2001. Both the credit and the deduction will be phased out completely by 2005. For more information about electric and clean-fuel vehicles, see chapter 12 in Publication 535, Business Expenses.

Tax Incentives for Empowerment Zones and Renewal Communities

The Community Renewal Tax Relief Act of 2000 generally empowerment zone status for existing zones through 2009, provides new or enhanced tax benefits to businesses in empowerment zones, and authorizes up to nine new zones. The Act also authorizes up to 40 renewal communities in which businesses will be eligible for tax incentives such as a 15% credit on the first $10,000 of the wages of certain employees, special cost recovery for commercial revitalization expenses, an increased section 179 deduction, and paying no tax on any capital gain from the sale of certain qualifying assets. In addition, the Act creates a new markets tax credit for equity investments in qualified community development entities. For more information, see Publication 954, Tax Incentives for Empowerment Zones and Other Distressed Communities.

Increased Section 179 Deduction for Enterprise Zone Businesses

The dollar limit on the section 179 deduction is increased for 2002 and later years if your business qualifies as an enterprise zone business. The increase is the smaller of the following amounts.

• $35,000.
• The cost of section 179 property that is also qualified zone property.

For more information, see Publication 954, Tax Incentives for Empowerment Zones and Other Distressed Communi-Environmental Cleanup Cost Deduction

The deduction for qualified environmental cleanup costs was scheduled to expire for costs paid or incurred after 2001. It has been extended to include costs you pay or incur before 2004. For more information about this deduction, see Publication 954, Tax Incentives for Empowerment Zones and Other Distressed Communities.

Self-Employment Tax

The self-employment tax rate on net earnings remains the same for 2002. 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 2002 has increased to $84,900.

All net earnings of at least $400 are subject to the Medicare part.

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