This publication discusses common business expenses and explains what is and is not deductible. The general rules for deducting business expenses are discussed in the opening chapter. The chapters that follow cover specific expenses and list other publications and forms you may need.

The following items highlight some changes in the tax law for 2006. More information on these and other changes can be found in Publication 553, Highlights of 2006 Tax Changes.

We removed two chapters that covered the following topics that were in the 2005 revision.

Capital gains treatment for certain self-created musical. . Capital gains treatment for certain self-created musical works has been made permanent.

Partial expensing for advanced mine safety equipment.  For costs paid or incurred for any qualified advanced mine safety equipment property after December 20, 2006, an election can be made to treat 50% of the cost as a currently deductible expense if the property is placed in service during the tax year. See chapter 7 for more information.

Tax rates and maximum net earnings. The maximum net self-employment earnings subject to the social security portion (12.4%) of the self-employment tax increased to $94,200 for 2006. There is no maximum limit on earnings subject to the Medicare portion (2.9%). See Schedule SE (Form 1040), Self Employment Tax.

Meal expense deduction subject to “hours of service” limits. For 2006, this deduction is 75% of the reimbursed meals your employees consumed while they were subject to the Department of Transportation's “hours of service” limits. See chapter 11.

Increased section 179 deduction dollar limit. . The maximum section 179 deduction you can elect for property you purchased and placed in service in 2006 has increased from $105,000 to $108,000. For more information, see Publication 946, How To Depreciate Property.

Elective deferrals. For 2006, the maximum amount of elective deferrals under a salary reduction agreement that could be contributed to a qualified plan increased to $15,000 ($20,000 if you were age 50 or older). For SIMPLE plans, the amount increased to $10,000 ($12,500 if you were age 50 or older).

Compensation limit. The maximum compensation used for figuring contributions and benefits for a retirement plan has increased from $210,000 to $220,000 for 2006.

Standard mileage rate. The standard mileage rate for the cost of operating your car, van, pickup, or panel truck in 2006 is 44.5 cents a mile for all business miles.

The following items highlight some changes in the tax law for 2007.

Domestic production activities deduction. The deduction rate for 2007 will be increased to 6%. See Form 8903, Domestic Production Activities Deduction, for more information.

Meal expense deduction subject to “hours of service” limits. For 2007, this deduction is unchanged at 75% of the reimbursed meals your employees consumed while they were subject to the Department of Transportation's “hours of service” limits. See chapter 11.

Elective deferrals. For 2007, the maximum amount of elective deferrals under a salary reduction agreement that can be contributed to a qualified plan increases to $15,500 ($20,500 if you are age 50 or older). However, for SIMPLE plans, the amount is $10,500 ($13,000 if you are age 50 or older).

Compensation limit. The maximum compensation used for figuring contributions and benefits for a retirement plan will increase from $220,000 to $225,000 for 2007.

Standard mileage rate. . The standard mileage rate for the cost of operating your car, van, pickup, or panel truck in 2007 is 48.5 cents a mile for all business miles.

IRS e-file (Electronic Filing)

You can file your tax returns electronically using an IRS e-file option. The benefits of IRS e-file include faster refunds, increased accuracy, and acknowledgment of IRS receipt of your return. You can use one of the following IRS e-file options.

For details on these fast filing methods, see your income tax package.

Qualified environmental cleanup (remediation) costs. The deduction for qualified environmental cleanup (remediation) costs include costs you pay or incur before 2006. See chapter 7.

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 before 2006. For more information on marginal production, see section 613A(c) of the Internal Revenue Code.

Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.