SMALL BUSINESS CAN CELEBRATE IRS RESTRUCTURING.
With the recent passage of the IRS Restructuring and Reform Act of 1998, many new taxpayer rights provisions now allow businesses to function more smoothly despite IRS audit or collection efforts. The new law 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.
The 1998 Reform Act resulted in large measure from the numerous 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. Here is a brief review of some of the new provisions of the tax laws that may affect individuals and small businesses:
1. Improved procedure for IRS offers-in-compromise where businesses and other taxpayers can negotiate a settlement of outstanding taxes owed. These improvements include more liberal acceptance criteria making it easier for the taxpayer to settle for less than the full amount owed) as well as a requirement that the IRS suspend collection activities during the compromise process or while the taxpayer appeals.
2. Imposing procedural safeguards upon the IRS while an issue is in the collections process. When a business is contesting a tax liability, it frequently finds itself caught by an aggressive IRS collecting machine where assets vital to the continued operation of the business are seized. 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.
3. Shifting the burden of proof to the IRS in a tax case in which the taxpayer introduces credible evidence relevant to a disputed issue. For a case that is litigated before the tax court, the shifting of the burden of proof cannot be underestimated. This change should reduce a great deal of pressure on the taxpayer and place it on the IRS. It should also make it easier on a taxpayer to dispute a tax liability that the IRS is claiming. Thus, it is easier to take a case to tax court.
Small business provisions.
The 1998 Reform Act also makes several important substantive changes to existing tax law.
1. Taxes can be deferred on gain from the sale of a business. Partnerships and S corporations can roll over gain on the sale of qualified small business stock, provided all interests in the partnership or S corporation are held by individuals, estates, or certain trusts.
Ordinarily the owner of a business has to recognize as taxable income all of the gain from the sale of the business. For example: Joe sells his printing business this year for $100,000. He initially invested $10,000 to get the business up and running and took a periodic salary. Joe would typically be liable for a taxable gain of $90,000 after the sale. Applying the 20% capital gain rate, this would mean Joe would have to pay tax on this gain of roughly $18,000 for the sale of his business.
The new rule allows Joe to invest the gain that would ordinarily be taxable into a new company. This investment “rolls over” the gain so that Joe does not have to pay taxes on the gain until he sells his interest in the new company. This permits tremendous tax savings on the sale of a business.
Home office deduction.
Under the prior law in order to get a tax deduction for a home office deduction, the principal place of business had to be the home office. A deduction could not be taken where the home office was used only for administrative or billing purposes even where the sole use of the home office was for the business.
Starting in 1999, taxpayers who set up offices at home to take care of the administrative or management side of their businesses will not be barred from taking a home office deduction, since the home will now be considered a principal place of business. You should be mindful, however, that the other home office deduction rules must be followed (for example, exclusive use for business) and the advantage of the home office deduction should be weighed against the qualification rules for the $500,000/$250,000 exclusion of gain on the eventual sale of your principal residence.
Courtesy of: J. Caleb Donner and Lori Donner are attorneys and partners in the law firm DONNER & DONNER, a full-service law firm practicing throughout Central and Southern California. They can be reached at (805) 494-6557 or e-mailed at [MAIL][email protected][ENDEMAIL]. Check out their web site at www.donnerlaw.com.