Choice Cuts

Credits Revisited

Several other measures of importance to small business that stand a good chance of passing this year are the "extenders." The president's budget plan includes proposals to extend the work opportunity credit, a welfare-to-work credit, and a research and development credit, all scheduled to expire this year.

Accountant Ken Powell, a tax partner with accounting firm David Berdon & Co. LLP in New York City, says, "The extenders have traditionally been extended, leading taxpayers to frequently ask, `Why keep extending them; why not make them permanent?'" For its part, Congress prefers to consider them annually.

When lawmakers take up the extenders this year, they may consider a new tax credit proposal outlined in the president's budget package. The new proposal would encourage more entrepreneurs to offer pension plans to employees by lessening the costs of establishing these plans. Under the proposal, business owners with 100 or fewer employees would receive a credit equal to 50 percent of the first $2,000 spent for first-year administrative and educational costs associated with setting up a new qualified benefit or defined contribution plan. In the second and third years, the credit would equal 50 percent of the first $1,000 of such expenses.

Proposals such as this one are attractive to lawmakers and can gather substantial bipartisan support. In this case, however, lawmakers are likely to have a difficult time deciding how to raise the revenue to pay for the deductions, says Susan Jacksack, a small-business analyst with CCH Inc., a provider of legal, tax and business information in Riverwoods, Illinois.

On the tax-hike front, President Clinton has proposed doing away with what he calls "corporate welfare" by closing a few loopholes. One of particular interest for small to midsized businesses would make converting from a regular corporation to an S corporation taxable.

Under the proposal, says Ochsenschlager, "Any appreciated property at the time of conversion would be taxed as if the property had been sold and then contributed to another corporation." If Congress agrees to the proposal, 1999 would be the last year corporations could switch to an S corporation without paying a tax. The president has included an exception to the proposed change for companies with a value of $5 million or less at the date the company decides to become an S corporation. Currently, making the change from a regular corporation to an S corporation is tax-free for both the corporation and its shareholders. Although it's not clear whether the proposal will pass, Powell advises regular corporations seriously thinking about a conversion to take action this year while the process is still tax-free.

While a good number of tax proposals for small companies are under consideration, ironing out a compromise between the Democrats and Republicans remains a major challenge. Even so, says Ochsenschlager, "There's tremendous pent-up demand in both tax-writing committees to provide some tax benefits." With such a climate brewing, analysts remain hopeful that tax relief for entrepreneurs is on its way.

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This article was originally published in the July 1999 print edition of Entrepreneur with the headline: Choice Cuts.

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