11th Hour

A number of other changes resulting from the new tax law will also impact small-business owners. While the provisions won't affect your 1997 return, keep them in mind as you look ahead to the new year and beyond.

The new law improves the health insurance deduction for self-employed individuals, for example. Under prior law, the deductible percentage was scheduled to move up from 40 percent in 1997 to 80 percent by 2006. Under the new law, the deduction is raised to 100 percent over several years. While the deduction remains at 40 percent of health insurance expenses in 1997, it will increase to 45 percent in 1998 and 1999. In 2000 and 2001, it will rise to 50 percent. It will reach 60 percent by 2002 and then jump to 80 percent from 2003 through 2005. In 2006, it will be 90 percent and will finally reach 100 percent in 2007.

The 20 percent alternative minimum tax for small companies is repealed for tax years starting January 1, 1998. A small company is defined as one that had average annual gross receipts of less than $5 million for a three-year period beginning January 1, 1995.

Under the new law, the tax treatment of home offices is liberalized starting in 1999. According to the change, business owners who keep records, schedule appointments and perform other such activities from a home office qualify for a deduction as long as they don't have any other fixed place of business where they do a large amount of administrative work. The change effectively overturns a Supreme Court decision that determined no deduction could be taken if the home office was used merely for administrative or management functions.

The new law also gradually increases the amount that is exempt from gift and estate taxes to $1 million by 2006. Currently, each taxpayer is entitled to make a combination of lifetime gifts and estate transfers of as much as $600,000 without paying gift or estate taxes. Next year, the amount begins to increase, rising to $625,000. In light of these recent changes, it's a good idea to carefully review your will or trust to determine if any changes need to be made, says Jacksack.

Starting in 1998, the new law limits to two years a business owner's ability to carry back net operating losses and extends the carry-forward period to 20 years. Under the old law, a business owner could carry losses back three years and forward 15. If you find yourself in this situation, you will have to utilize these losses within a shorter carry-back period, says Dow.

Limited partners can breathe a sigh of relief, thanks to the new tax law. An IRS regulation that would have charged self-employment taxes on the business profits of thousands of limited partners was given a temporary moratorium under the Taxpayer Relief Act. Though at this point the change is not permanent, supporters of the moratorium hope it will raise awareness among small-business owners of the dangers of the "stealth" tax and act as a call to action to make the moratorium permanent. (For more information, see "Tax Talk," September.)

While tax-planning should be a year-long endeavor, many taxpayers wait until December's final days to come up with strategies to save on their tax bills. If you find yourself in that situation, don't despair, says Webb. You still have time to make some tax-saving moves for 1997 and get ready for next year, when, thanks to the Taxpayer Relief Act, there will be new ways to trim your federal tax bill.

Contact Sources

CCH Inc., http://www.toolkit.cch.com

Coopers & Lybrand LLP, 1 Metropolitan Sq., #2200, St. Louis, MO 63102, mark.dow@us.coopers.com

Gelfond Hochstadt Pangburn & Co., (303) 831-5038, bwebb@ghpcpa.com

Wilson, Sonsini, Goodrich & Rosati, 650 Page Mill Rd., Palo Alto, CA 94301-1050, (415) 493-9300

This article was originally published in the December 1997 print edition of Entrepreneur with the headline: 11th Hour.