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Credits When Credits Are Due


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CREDITS WHEN CREDITS ARE DUE

The Taxpayer "Relief" Act? Ha! Congress' 329-page attempt to improve the tax code last year gave small businesses a host of breaks, but with a confusing array of start and end dates. Business owners must act soon to take advantage of credits expiring this summer. Some tips: Frontload research spending before June 30, and the Research Credit lets you subtract 20% of what you spend from your final tax bill. Also, hire from a covered group of workers before July 1 to take advantage of the Work Opportunity Credit. Senior citizens and other recipients of supplemental security income have joined ex-cons and welfare recipients among those who qualify. Employers can subtract from their tax bill 40% of first-year wages (up from 35%), to a maximum of $2,400. The new Welfare-to-Work Credit is more generous: up to $3,500 in the employee's first year and $5,000 in the second. Plus, it doesn't expire until Apr. 30, 1999.EDITED BY EDITH HILL UPDIKEReturn to top

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BREAKS FOR SMALL BIZ IN THE 1997 TAXPAYER RELIEF ACT

The $1.3 million estate-tax exemption for family-owned businesses and farms is typical of many new provisions in the 1997 Taxpayer Relief Act: Tax specialists say its complex eligibility requirements and restrictions are onerous enough to virtually eliminate any real benefit.

Still, little tax breaks are better than none -- and the 1997 law does contain numerous goodies that you should be aware of. To save you the time of thumbing through the law's 329 pages, here's a checklist of the provisions likeliest to affect a small business. Most of them became effective this year and won't lower your tax bill until April, 1999, at the earliest -- but a few went into effect in 1997. These provisions could cut this year's tax bill.--Health insurance deduction accelerated for self-employed individuals:

The cost of medical insurance for yourself, your spouse, and dependents is 40%-deductible in 1997, 45%-deductible in 1998 and 1999, and 50%-deductible in 2000 and 2001. The deduction increases by 10% a year until it reaches 100% in 2007.--Changes relating to "SIMPLE" (Savings Incentive Match Plan for Employees) retirement plans:

Business owners and partners can make tax-deductible matching contributions to the new SIMPLE IRAs and SIMPLE 401(k) plans, as well as to regular 401(k)s. Previously, owners' and partners' matching contributions to regular 401(k) plans were treated as elective deferrals. In other words, they could contribute up to $9,500 of personal salary to a plan, but that elective deferral could not be matched from company coffers.

The new law also allows employers to establish a SIMPLE plan for nonunion employees even if the company maintains a separate qualified retirement plan for collectively bargained workers.--Family-owned business exemption from estate taxes:

Starting in 1998, small businesses and family farms are eligible for a $1.3 million federal estate tax exemption. The $1.3 million includes the standard unified gift and estate tax credit, which is $625,000 this year and will gradually rise to $1 million by 2007. (In other words, the $1.3 million exemption is worth $675,000 this year and will be worth $300,000 in 2007.)

To qualify for the exemption, a business must be 50%-owned by the decedent and members of his family, or in the case of a two-family business, 70%-owned by family members. A three-family business must be 90%-owned by family members. The beneficiaries must keep the business for at least 10 years. If they sell it in less than seven years, the full value of the exemption becomes taxable. Starting the seventh year, the recapture requirement phases out by 25% annually, so by the end of the 10th year, it expires.--The AMT is repealed for small businesses starting in tax year 1998:

If your business had $5 million or less in average annual gross receipts for the three previous tax years (1995, 1996, and 1997), it is now exempt from the alternative minimum tax. The AMT, which tax specialists say has rarely applied to small businesses anyway, is a special tax designed to prevent corporations from getting too much benefit from tax breaks. A business might be subject to the AMT in a year when it had an unsually big write-off, for example, or realized a large amount of tax-exempt income from a life insurance payment triggered by a buy/sell agreement.--Carryover and carryback provisions changed for net operating losses and credits:

A business with no taxable income for the year can use what are known as "carryforward provisions" to apply its unused tax credits to reduce a future year's taxes and the "carryback provisions" to file an amended return reducing a previous year's taxes. Credits (for hiring welfare recipients, for example) reduce income taxes on a dollar-for-dollar basis. Starting this year, the carryback period for unused credits is reduced from three years to one year, and the carryforward period is increased from 15 years to 20 years. Under the new law, unused credits that arise in tax years beginning before 1998 can still be carried back for three years, but any unused credit arising in 1998 can be carried back only to 1997.

Losses reduce taxable income. A business with no taxable income for the year can also use the carryforward and carryback provisions to apply its net operating losses to future or past income tax years. Starting after August 5, 1997, the carryback period for "unused" net operating losses is reduced from three years to two years; the carryforward period is increased from 15 to 20 years. --Electronic Federal Tax Payment System penalties delayed:

Penalties for failure by small businesses to pay corporate and employment taxes through the Internal Revenue's electronic transfer system are waived until July 1, 1998. However, the waiver applies only if you fail to make the deposit by electronic funds transfer. The deposit itself still must be made on time to avoid a late deposit penalty.--New and modified/extended tax credits:

The orphan drug credit (for research to develop drugs to treat rare diseases) has been retroactively restored and permanently extended.

Corporate gifts of computer technology and equipment to elementary and secondary schools made before 2000 get a charitable-deduction tax break. --One more little break:

Beginning in 1999, the home-office deduction is allowed when the office is used exclusively for the administration and management of a business. This provision effectively overturns the 1993 Supreme Court ruling in Com. v Soliman. Soliman, an anesthesiologist, used a home office exclusively for business bookkeeping, but the court ruled he couldn't claim the home office deduction because the office wasn't his principal place of business. The 1997 law now specifies that the deduction is permitted for a home office that is the only place where you regularly and exclusively carry out the management and administration of your business, even if the business itself is conducted elsewhere.By Lynn Brenner in New YorkReturn to top


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