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General Business Provisions Alternative
Minimum Tax Business Provisions
- Repeal of alternative minimum tax adjustment for depreciation: The Act continues
a slow drive toward removing depreciation from the list of alternative minimum tax (AMT)
adjustments. The depreciation adjustment taken into account when computing adjusted
current earnings was repealed in 1996. This year, Congress has taken a next step by
providing that AMT depreciation will be computed using the same lives as once used for
regular tax purposes (but with the same AMT method now in effect).
Effective date: Effective for assets placed in service after Dec.
31, 1998.
- Repeal of alternative minimum tax for small business corporations: The corporate
alternative minimum tax will not apply to small business corporations. A corporation is a
small business corporation for its first taxable years beginning after 1997 if it has
average gross receipts of no greater than $5 million for three consecutive taxable years
beginning with the taxable year beginning after Dec. 31, 1994. A corporation that meets
the $5 million gross receipts test will continue to be considered a small business
corporation so long as its average gross receipts do not exceed $7.5 million.
A corporation that subsequently earns more than $7.5 million of gross receipts will become
subject to the corporate alternative minimum tax, but only with respect to adjustments and
references that relate to transactions and investments entered into after the corporation
loses its status as a small business corporation.
Transition rule and effective date: Small businesses that
have alternative minimum tax credit carryforwards as of the date of enactment may utilize
their credit to reduce their regular tax liability to no less than 25% of the amount by
which their regular liability exceeds $25,000.
Effective for taxable years beginning after Dec. 31, 1997.
- Repeal AMT adjustment for installment sales by farmers: In response to an
Internal Revenue Service position, Congress clarified that the alternative minimum tax
adjustment for installment sales does not apply to installment sales of farm property.
Effective date: Effective for taxable years beginning after Dec. 31,
1987.
- Minimum tax treatment of certain property & casualty insurance companies: Adjusted
current earnings of small property and casualty insurance companies that have elected to
be taxed only on their taxable investment income shall be determined without regard to all
other items of income and expense not included in gross investment income.
Effective date: Effective for taxable years beginning after Dec. 31,
1997.
Extension of Certain Expiring Tax Provisions
Some of the temporary provisions that expired in 1997 are reinstated again, generally
for only a temporary period. The temporary nature of these extensions will force Congress
to search for additional revenue once again to extend these provisions in the future.
- Research tax credit: The Act extends the research credit for expenses paid or
incurred from June 1, 1997, through June 30, 1998. The Act also extends the election to
use an "alternative incremental research credit."
Effective date: This section shall apply to amounts paid or incurred
after May 31, 1997.
- Extension for exclusion for employer-provided education: The exclusion for
employer-provided educational assistance is extended to courses beginning prior to June 1,
2000. Under current law, an employer can provide employees with up to $5,250 of tax-free
educational assistance for non-graduate level courses when the expenses are paid through
an educational assistance program that meets certain requirements. The exclusion was
scheduled to expire for courses beginning after July 1, 1997.
Effective date: The extension of this provision is effective for tax
years beginning after Dec. 31, 1996.
- Contributions of stock to private foundations: The special rule allowing
taxpayers to deduct an amount equal to the fair market value of "qualified
appreciated stock" contributed to a private foundation that expired after May 31,
1997, is extended through June 30, 1998. The section is retroactively effective to June 1,
1997.
- Work opportunity tax credit: The Act extends a modified version of the work
opportunity tax credit through June 30, 1998. The Act expands the definition of eligible
workers to include certain additional family members receiving assistance under a food
stamp program and persons certified by a local agency as receiving certain Supplemental
Security Income (SSI) benefits within 60 days of the hiring date. The Act also reduces the
minimum employment period to 120 hours, and modifies the credit percentage to 25% of the
first 400 hours worked, and 40% thereafter.
Effective date: The amendment shall apply to individuals who begin
to work after September 30, 1997.
- Orphan drug tax credit: The Act permanently extends the orphan drug tax credit.
Effective date: The provision would be effective for qualified
clinical testing expenses paid or incurred after May 31, 1997.
Other General Business Provisions
- Regulated investment companies (mutual funds): The Act repeals the prior-law rule
that required a company to derive less than 30% of its gross income from the sale or other
disposition of stock or securities held for less than 3 months (the "30% test"
or "short-short rule") in order to qualify as a regulated investment company.
Effective date: This provision is effective for taxable years
beginning after the date of enactment.
- Business meals deduction of transportation workers: The Act increases to 80% the
amount allowable as a deduction for food and beverages consumed away from home by an
individual, such as an airline crew member or long-haul truck driver, subject to the hours
of service limitations of the Department of Transportation. The increase is phased in
through a 5 percentage point increase every two years starting in 1998.
Effective date: The increased deduction is effective for tax years
beginning after 1997.
- Enhanced deduction for corporate contributions of computer technology and equipment:
The Act provides that a C Corporation donating qualified computer technology and equipment
to primary and secondary schools may deduct an amount equal to fair market value less
one-half of the amount of ordinary income that would have been realized if the property
had been sold, not to exceed twice the basis of the property. Qualified property is
property acquired or constructed by the taxpayer no more than 2 years prior to the date of
the contribution.
Effective date: This provision is effective for contributions made
in years beginning in 1998 and before 2001.
- District of Columbia tax incentives: In an effort to boost economic activity and
encourage citizens to reside in the District of Columbia, special tax incentives have been
made available under the Act. These D.C. enterprise zone incentives generally apply to
activities in existing D.C. enterprise communities and in census tracts with greater than
20% poverty.
- Incentives available after 1997 and before 2003 include a 20% wage credit for the first
$15,000 of wages paid to D.C. residents who work in the zone.
- Qualified zone businesses are eligible for a zero percent capital gains rate for capital
gains on the sale of certain qualified zone assets held for more than five years (subject
to certain restrictions, definitions, limitations, and effective dates).
- A $5,000 first-time homebuyer credit for individuals buying a principal residence in the
District before 2001. The credit phases out for joint filers with incomes between $110,000
and $130,000 and single taxpayers with incomes between $70,000 and $90,000.
Small Businesses and the Self Employed
Clarification of standard to be used in determining tax status of retail securities
brokers: The Act provides that because brokerage houses are required to monitor
compliance with investor protection laws, weight should not be given to this monitoring
when determining the employee/independent contractor status of a registered
representative.
Effective date:This provision of the Act is effective for
services performed after 1997.
Home office deduction -- definition of principal place of business: The Act
liberalizes the rules for home office to overrule a Supreme Court decision that had held
no deduction was available with respect to an office in which the taxpayer merely
performed administrative or management activities while the essence of the taxpayer's
professional services were performed outside of the home. A home office will qualify as a
principal place of business if it is used by the taxpayer to conduct administrative or
management activities of a trade or business and there is no other fixed location of the
trade or business where the taxpayer conducts substantial administrative or management
activities. The other requirements of the home office deduction rules still apply,
including the requirement of exclusive and regular use and, in the case of employees, the
convenience of the employer rule.
Example: A doctor who consults with her patients at various local hospitals
now may claim a home office deduction for a portion of her home that is exclusively and
regularly used to conduct her administrative or management activities of her trade or
business. If she is an employee, then the use of the home must also be for the convenience
of her employer. Additionally, she may not conduct any other significant administrative or
management function at another fixed location.
Effective date: Effective for taxable years beginning after Dec.
31, 1998.
Delay EFTPS penalties: The Act again delays enforcement of the requirement that
all taxpayers depositing more than $50,000 in 1995 use the Electronic Federal Tax Payment
System (EFTPS) by postponing the 10% penalty for failure to make deposits electronically.
No penalty will apply to deposits made before July 1, 1998.
Effective date: Effective on July 1, 1997.
| Planning Point: Many
taxpayers enrolled in the EFTPS system through a payroll service. Since the law requires
that all of their federal tax payments, such as corporate estimated taxes, be made through
EFTPS, these taxpayers may be required to enroll in EFTPS or arrange with their payroll
service to make these other federal non-payroll tax payments. This Act only postpones the 10% failure to use the EFTPS penalty. Taxpayers
may want to make their initial EFTPS transfer one day early to allow enough time to make
their payment through other means, such as a manual deposit. This will prevent the
imposition of the late payment penalty in cases where the taxpayer has difficulty using
the EFTPS system. |
Self-employed health insurance deduction: As part of the Health
Insurance Portability and Accountability Act of 1996, the deduction for health insurance
premiums of self-employed taxpayers was increased from 30% to 40% for the 1997 taxable
year with the deductible percent eventually reaching 80% for taxable year 2006 and beyond.
The Act increases the 1997 taxable year deduction to 40% and provides that a 100
percent deduction will available in taxable years 2007 and beyond as follows:
Phase-in of Self-Employed
Health Insurance Deduction |
For Taxable Years
Beginning in |
Deductible
Percentage |
| 1997 |
40% |
| 1998 |
45% |
| 1999-2001 |
50% |
| 2002 |
55% |
| 2003-2005 |
80% |
| 2006 |
90% |
| 2007 and thereafter |
100% |
Individuals
Modification to standard deduction of dependents; AMT treatment of certain minor
children: If a child (or other individual) is claimed as a dependent on another
taxpayer's return, that child's otherwise available standard deduction may be limited to
an amount equal to the child's earned income. In such a case, the Act increases the limit
by $250 (indexed for inflation after 1998), thereby allowing the child to have a small
amount of investment income without having to compute and pay tax.
The Act also increases the AMT exemption amount for a child under age 14 to the lesser
of the individual exemption amount ($33,750), or the sum of the child's earned income plus
$5,000 (also indexed for inflation).
Effective date: This provision is effective for tax years
beginning after Dec. 31, 1997.
Increase in de minimis threshold for estimated tax to $1,000 for individuals:
The Act increases from $500 to $1,000 the amount that a taxpayer may underpay tax
(total tax liability for the year, less tax withheld, and estimated payments must be
$1,000 or less) without incurring an addition to tax.
Effective date: This provision is effective for tax years
beginning after Dec. 31, 1997.
Increase in the standard mileage rate for purposes of computing the charitable
deduction: The Act increases the standard mileage rate for purposes of computing the
charitable contribution deduction from 12 cents per mile to 14 cents per mile.
Effective date: This provision of the Act is effective for years
beginning after 1997.
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