Small Biz Tax Relief: What's Cooking?

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Self-employed individuals and small firms pay approximately $800 million in taxes that the federal government collects each year. Senator Christopher "Kit" Bond, Chairman of the Senate Committee on Small Business, wants to do something to relieve their tax burden.

Bond today introduced the "Small Business Works Act of 2001," designed to complement the broad-based tax relief package proposed by President Bush.

"With an economy that appears to be slowing, small businesses are likely to be among the first affected. We need to ensure that they benefit from any tax stimulus enacted this year to secure their continued vitality in the future," Bond said Thursday.

" . . . the current tax law represents a morass of rules, regulations, forms and penalties with which all of the self-employed must contend."

Major Provisions - Tax Relief:

Self-Employed Health Insurance Deductibility: Provides an increase of the deduction for health-insurance costs for self-employed individuals to 100 percent beginning on January 1, 2001. Currently, the self-employed can only deduct 60 percent of those costs. The deduction is not scheduled to reach 100 percent until 2003, under the provisions signed into law in October 1998. It also corrects a disparity under current law that bars a self-employed individual from deducting any of his or her health-insurance costs against their self-employment taxes, putting them on an equal footing with wage earners - putting them on an equal footing with wage earners who participate in pre-tax health-insurance plans.

Alternative Minimum Tax Relief: Repeals the individual Alternative Minimum Tax (AMT), an increasingly burdensome tax for individuals. The bill eliminates 20 percent of the individual AMT each year until complete repeal is achieved in 2006. During the phase-out period, the bill extends the current exclusion of personal tax credits from the AMT, and coordinates the farm income-averaging rules with the AMT, to ensure that farmers and ranchers do not lose the benefits of income averaging. It also extends the exemption from the corporate AMT for small corporations.

Repeal of Federal Unemployment Surtax: Repeals the 0.2 percent surtax beginning in taxable year 2001. In 1976, a surtax was added to the Federal Unemployment Tax to repay loans from the federal unemployment fund made during the 1974 recession, which were repaid in 1987.

Extend Research and Experimentation Tax Credit Permanently: Extends permanently the research and experimentation (R&E) tax credit, which has been a valuable resource for businesses developing new products. Under current law, the R&E tax credit is set to expire in June 30, 2004.

Increased Deduction for Business Meal Expenses: Increases the limitation on the deductibility of business meals from the current 50 percent to 80 percent beginning in 2001. Unlike their large competitors, small enterprises often sell their products and services by word of mouth and close many business transactions on the road or in a local diner. For many small business owners these meetings serve as their advertising, but unlike a newspaper ad, which is fully-deductible, the business breakfast is only 50 percent deductible.

Major Provisions - Tax Simplification:

Clarification of Cash Accounting Rules for Small Businesses: Provides a clear threshold for small businesses to use the cash receipts and disbursements method of accounting, instead of accrual accounting. To qualify, the business must have $5 million or less in average annual gross receipts based on the preceding three years. The bill also eases the burden of the inventory accounting rules on small enterprise.

Increase in Expense Treatment for Small Businesses: Increases the amount of equipment purchases that small businesses may expense each year from the current $24,000 to $50,000. This change will eliminate the burdensome record keeping involved in depreciating such equipment and free up capital for small businesses to grow and create jobs. The bill also adjusts the phase-out limit on expensing and allows computer software to be expensed.

Modification of Depreciation Rules: Modifies outdated depreciation rules to permit taxpayers to depreciate computer equipment and software over a two_year period. Under present law, computer equipment is generally depreciated over a five_year period while software is usually depreciated over three years. The bill also increases the limitation on depreciation of business vehicles for small businesses that rely on automobiles and vans to make sales calls and deliveries.

Simplification of Estimated Tax Rules: Simplifies the current rules for calculating the level of estimated taxes necessary to avoid the interest penalty for underpayment. The bill provides a consistent test: Taxpayers must deposit estimated taxes equal to 90 percent of the current year's or 100 percent of the prior year's tax liability.

Electronic Filing Clarification: Goal not a Mandate: Amends the "Internal Revenue Service Restructuring and Reform Act of 1998" (Public Law 105_206) to clarify that paperless filing must be a voluntary option for taxpayers as the IRS works to reach its goal of 80 percent of all tax and information returns by the year 2007.

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