Recent Tax Legislation—Small Business Tax Breaks

With the passage of the sizable IRS Restructuring and Reform Act of 1998 last year—and its subsequent interpretation by the IRS in 1999—small businesses have good cause to celebrate. Many new taxpayer rights provisions now allow businesses to function more smoothly despite IRS audit or collection efforts. But perhaps more importantly, the new law also expands, clarifies, and fine-tunes many of the most significant small-business oriented provisions in the Taxpayer Relief Act of 1997. Some of these provisions can just be pulled off the shelf and implemented when the need arises, while others require careful planning in order to fully realize certain tax benefits.

Taxpayer rights. Much of the testimony before the Senate preceding the enactment of the IRS Reform Act involved horror stories of small businesses dealing with IRS agents' abusive tactics. The new law attempts to level the playing field for a small business when dealing with the IRS in certain key areas. Some of the more important new provisions include:

l Improving the offers-in-compromise procedure in which businesses and other taxpayers can work out a negotiated settlement of an outstanding tax liability. These improvement not only include more liberal acceptance criteria but also a requirement that the IRS suspend collection activities during the compromise process or while the taxpayer appeals.

l Imposing procedural safeguards upon the IRS while an issue is in the collections process. When a business is contesting a tax liability, it may find itself caught by a rapidly-advancing IRS collection machine in which the IRS may seize assets vital to the business. The new law requires the IRS to give 30 days notice before any levy or seizure. During this period the taxpayer can request a hearing by IRS Appeals and immediately halt the collection process.

l Shifting the burden of proof to the IRS in a tax case in which the taxpayer introduces credible evidence relevant to a disputed issue.

l Extending the confidentiality privilege in administrative proceedings and certain civil tax cases to tax advisors authorized to practice before the IRS.

Small business provisions. The IRS Reform Act also does far more than focus on problems with the IRS. Congress also took this opportunity to make "technical corrections" to the Taxpayer Relief Act of 1997 that are favorable for small businesses. Many of these "corrections" have important substantive significance.

l Partnerships and S corporations can roll over gain on qualified small business stock, provided all interests in the partnership or S corporation are held by individuals, estates, or certain trusts.

l Employers that maintain both a defined benefit plan and a SIMPLE IRA plan in the same tax year because of a merger, acquisition, disposition or similar transaction are eligible to treat the SIMPLE plan as a salary reduction plan from the date of the transaction through the following two tax years.

l For purposes of the small business exemption from the corporate minimum tax, if a corporation's first tax year after December 31, 1997 (the first year the exemption is available) is its first tax year and the corporation is not treated as having a predecessor, the corporation will be treated as an exempt small business regardless of its receipts for the year. It will, therefore, not be subject to the $5 million and $7.5 million gross receipts test until the following tax year.

Family-owned businesses and the estate tax. The Act also changes the important TRA '97 exclusion for family-owned businesses to a deduction and coordinates the family-owned business provision with the phased-in increase in the unified credit. Although the Act clarifies the trade or business requirement and expands the definition of a qualified heir, careful planning is still required to ensure that the business meets the complex eligibility requirements.

This wide-ranging recent tax legislation most probably affects you, your business and your estate planning in several ways in 1999 and in future years. If you have any questions concerning the new tax or you would like to schedule an appointment to discuss in depth its impact on you and your business, please do not hesitate to call.