Despite the general moaning and groaning from small-business owners about higher taxes, last year's budget deficit reduction package contained several provisions that will benefit the group.
Their cause was helped by a sympathetic audience in Congress. A staffer for Rep. Dan Rostenkowski (D-Ill.), the powerful chairman of the House Ways and Means Committee who threw his weight behind several of these measures, said: "It was the chairman's feeling that there were ways to alleviate the pain of the budget deficit reduction bill for small businesses. He knew we needed balance in the package, that it couldn't be just hard medicine."
* First, the 25% deduction for health-insurance costs for the self-employed individual or the unincorporated business has been extended for another 15 months.
Business groups, such as National Small Business United and the U.S. Chamber of Commerce, have long argued that these businesses also should be able to deduct 100% of their health-care costs, just like corporations.
Indeed, Rep. John LaFalce, chairman of the Small Business Committee, has introduced legislation in recent years to do just that. But his efforts have been stymied because the recent economic climate has made it difficult to pass anything that involves a revenue loss, no matter how much sense it makes. "This is a clear-cut case of discrimination in the tax code," said one of LaFalce's staff members.
The business trade organizations will continue to lobby for the 100% deduction as part of their ongoing efforts to come to terms with the health-care crisis.
* The Americans with Disabilities Act has been a big concern to small businesses and a special tax credit was incorporated into the deficit deal to help cover the costs of complying with the new law.
Small businesses may be eligible for a tax credit of up to $5,000. The credit can be applied to half the cost of renovating a place of business to accommodate people with disabilities.
Because the credit was traded for a lower cap on a deduction for the removal of architectural barriers (reduced to $15,000 from $35,000) that was already in the tax code, this provision will have both winners and losers. But more small businesses will be among the winners because the businesses eligible for the more valuable credit are those with fewer than 30 full-time employees who work 30 hours per week for 20 weeks.
* The Research and Experimentation Tax Credit, which has been particularly helpful for the small, start-up, high-tech firms, has been extended through the end of 1991. The provision allows such companies a credit for up to 20% of the qualified research and development costs that exceed the previous year's costs.
* Also extended through the end of 1991 was the Targeted Jobs Tax Credit, which gives employers the option of taking a tax credit for employing individuals from certain target groups.
Eligible groups include young adults from economically disadvantaged families, ex-convicts from economically disadvantaged families who are hired within five years of their conviction or release from prison and individuals with disabilities undergoing vocational training.
The provision allows a credit for up to 40% of the first $6,000 of first-year wages paid to each individual who began work after 1985. This credit is available to all businesses.
* Small-business groups are most pleased about the repeal, retroactively, of Section 2036(c) of the Internal Revenue Code--also known as the Estate Freeze law.
Before its enactment in 1987, it was possible for one family member to freeze the value of his estate by retaining its current value in the form of preferred stock and to transfer the future growth of his company to others in his family through the form of common stock. Preferred stock will not increase in value, common stock will.
Although the practice has been used for decades, the Internal Revenue Service complained that the estate freezes were being used to avoid the payment of appropriate transfer taxes because the common stock was routinely undervalued.
But family-owned firms then complained that the wording of 2036(c) was so broad that it threatened the liquidation of many businesses, in which family members were unable to pay the transfer taxes that amounted to as much as 55% of the total value of the estate.
The deficit deal replaced 2036(c) with Chapter 14 of the Estate and Gift Tax of the Internal Revenue Code. Once again, it will be possible to use the estate tax freeze in estate planning, but Chapter 14 provides special valuation rules to force a value on the transferred interest equal to a minimum of 10% of the value of the business' equity. It addition, it requires the payment of a dividend on the preferred stock kept by a parent.
"The change in the estate freeze law was a major victory for small businesses," said John Galles, executive vice president of National Small Business United.