Businesses face bevy of tax-law changes

Congress passed many new tax laws this year, and as with tax changes every year, they’re intended to simplify tax law and generate more money into the economy.

Because tax law is never simple by nature, it is unlikely that the hand of Congress will do much to change that anytime soon.
“There are a couple of reasons why the tax code is so complicated,´ said Myron Hulen, associate professor teaching taxation at Colorado State University in Fort Collins. “The tax code is designed to stimulate the economy – they want to make money, and they want to encourage certain social goals, such as [that] employers get a deduction for paying employees medical insurance.”
The second reason for our complex tax structure is the demand for equity, Hulen added.
“Achieving equity is very much in the American psyche,” he said. “So it is an attempt to achieve equity in certain tax brackets that causes a lot of complexity in the tax code. And all the drives to simplify usually mean sacrificing equity, so the flat tax doesn’t have a snowball’s chance in hell of passing.”
Most of the changes passed by Congress this year were minor but will affect just about everyone.
“A lot of these changes are nitpicky, but if it affects your business, then it is a big change,´ said Cecil McPherron, certified public accountant with Anderson & Whitney, CPAs, in Greeley.
Several sweeping tax bills were passed by Congress in 1996, but most became entangled in budget battles and resulted in a presidential veto.
In August, however, shortly before its recess, Congress passed the Small Business Job Protection Act, the Health Insurance Reform Act and the Taxpayer Bill of Rights, and these three tax bills affect virtually all individuals and small businesses.
Most of the changes for businesses go into effect in 1997.
The deduction for health-insurance premiums for the self employed, for example, will stay the same this year at 30 percent. But in 1997, 40 percent of health-insurance premiums may be deducted from income tax. The deduction for health insurance will continue to increase over the next 10 years. In 1998, it will be 45 percent; in 2003, 50 percent; 2004, 60 percent; 2005, 70 percent; and 2006 and thereafter, the deduction will be 80 percent.
This, and any other tax law, is always subject to change by Congress at any time.
Beginning in 1997, people will be able to deduct unreimbursed qualified long-term care expenses as medical expenses and to deduct premiums on long-term health insurance the same as health-insurance premiums.
Businesses will find a new retirement plan in effect for employees next year.
“There is a new plan called SIMPLE retirement plan for employers with 100 or fewer employees who don’t have other plans,” McPherron said. “The SIMPLE plan is a 401(k) and IRA (Individual Retirement Account) combination, which is supposed to simplify things for small businesses.”
In this plan, employees can make contributions of up to $6,000 per year instead of the normal $2,000 for an IRA with the employer matching 3 percent of the contribution.
“This is a payroll deduction which can go into an individual IRA, so there is less paperwork for the company,” McPherron said.
There is some good news for small companies held as S corporations. S corporations are a very popular form for many closely held businesses, and almost one-half of all corporations have chosen to be taxed under the subchapter S.
S corporations are set up just like regular corporations, except that the company is taxed at the individual shareholder level and not as a corporation. The corporation files a statement, but all income taxes are paid by shareholders on their personal income taxes.
“Next year, an S corp can own another corporation, and that will be new next year,” McPherron said. “Also, S corps will be able to have 75 shareholders. This year, they can only have 35 shareholders.”
Businesses are getting a reprieve from depositing federal payroll taxes electronically. It won’t come as a surprise to many, but the feds need more time to get their software and equipment up and running.
“Electronic deposits of all federal taxes for employees for businesses which deposited $50,000 or more of payroll taxes in 1995, have a six-month reprieve,´ said Dave Zamzow, CPA with Allard & Associates, CPAs, in Fort Collins. “Employers were going to be required to make fund transfers on Jan. 1, but that date was pushed back to July.
“This means that most businesses with 25 employees or more will be forced to comply with the electronic transfer. But they may push the date back even farther,” Zamzow said.
Expense deductions for business property will increase. For 1996, you can write off up to $17,500 of the cost of business personal property such as computers, furniture, equipment, etc. Beginning in 1997, this deduction will increase to $18,000 and increases each year thereafter until it reaches $25,000 in 2003.
Medical savings accounts begin in 1997. Employees and self-employed may make deductions to MSAs, which will be similar to IRAs. When used to pay medical expenses, the money deposited in the MSA cannot be taxed.
Amounts contributed by employers to MSAs will not be included in an employee’s income. To qualify, employers cannot employ, on an average, more than 50 employees, and self-employed, generally, can be covered only by a high-deductible plan.
The Employer Provided Educational Assistance Act allows businesses to deduct educational assistance retroactively for years beginning after 1994 and before June 1, 1997.
And for businesses that have traditionally benefited from the target jobs tax credit for employing low-income and certain other disadvantaged employees, that credit expired Dec. 31, 1994. But Congress has established the work opportunity tax credit. This new credit is for wages paid to workers, in certain target areas, who begin work after Sept. 30, 1996, and before Oct. 1, 1997.
A few changes have been made under the Tax Payer Bill of Rights.
“If you want to send something to the IRS, the date of the U.S. postmark is the date the IRS accepts as the official date,” Zamzow said. “Now they are allowing UPS [United Parcel Service] and other postal services to stamp dates that will be considered official.”ÿ