Making April 15th less taxing for small US business
Times are tough for American small business. Interest rates are draining cash reserves and a spongy economy yields fewer sales. Reagan's Economic Recovery Act contains many tax cuts aimed at commerce in general, but what does the bill do for the corner grocer, the family florist, the little guy in business for himself?
"Overall, we can look at it and say Congress did respond to the needs of small business," says Lewis Shattuck, executive vice-president of the Smaller Business Association of New England (SBANE). Will small business benefit from accelerated depreciation?
Accelerated tax write-offs for new plant and equipment, a gift for all business, may help some small manufacturers -- especially technology companies racing to be first with the next generation of electronic equipment.
Tucked behind the Accelerated Cost Recovery System (ARCS) depreciation provisions, one small change seems particularly significant for little firms. "Expensing" -- where a purchase is treated as a business expense, and written off in one year -- will be increased. The expensing limit will be $5,000 worth of goods in 1982, phasing in to a $10,000 limit by 1986.
Expensed equipment doesn't qualify for investment tax credits. Accountants say the provision will help small firms in high tax brackets.
"In a lower bracket, you might need the tax benefit down the road more," says Jack Murphy, tax partner with accounting firm Arthur Young.
The fast-moving tech firms, like Intel and GCA, may further benefit from tax baubles dangled to encourage research and experimentation. Any company that spends more on research and development than its average over the last three years gets a tax credit equal to 25 percent of the increase.
But for small retailers or service companies, accelerated depreciation probably won't make much difference.
"Many small businesses are labor intensive, and not capital intensive," says an accountant who works for a small business group. "They don't buy a lot of machinery." Are there any presents in the tax bill intended specifically for small businessmen?
Four gift-wrapped clauses in the act have small business's name on them. Some may be more valuable than others.
* Corporate income tax rates have been cut. The Reagan Recovery Act reduces the government's bite out of taxable profits under $50,000. Currently, income of less than $25,000 is taxed at 17 percent, and $25,000-$50,000 faces a levy of 20 percent. Both rates will go down 1 percentage point next year, and another point in 1983.
Small business groups had hoped for a more significant reduction.
* It will be easier for small firms to use favorable accounting. LIFO (Last in, first out) is a bookkeeping method which, in effect, takes inflation out of figuring inventory costs. It is not an easy thing to use.
The tax bill allows small businessmen to lump all their inventory into one "pool" for LIFO purposes, even if they carry many different items. It promises that the Treasury Department will publish indexes of inflation for different types of inventories.
* More companies will enjoy the favorable tax treatment of partnerships. Under current law, corporations with 15 stockholders or less qualify as "Subchapter S", with profits taxed only at the level of personal income. (For larger companies, profits are taxed at two levels: first as corporate income, then, after distribution, as personal income.)
Under new law, the legal number of shareholders is increased to 25. Certain types of trusts will also be permitted as shareholders.
* Small business can accumulate larger lumps of capital, without the IRS poking into the situation. Right now, companies that let profits pile up over $ 150,000, so stockholders won't have to pay personal income tax, are subject to an accumulated earnings tax.
The tax hinges on purpose. If the company can prove it needs the money for future operations, the IRS goes away.
The new bill raises the ceiling to $250,000, except for certain service companies such as accounting.
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