Many of the tax cuts granted to individuals by the 1997 Tax Act will be fueled by corresponding increases in taxes paid by businesses. Those increases will result primary from (1) the imposition of significant limitations on NOLs and on tax credit carrybacks; (2) the extension of the federal unemployment surtax; (3) the imposition of new taxes on financial instruments; and (4) the restructuring of tax provisions governing corporate reorganizations. Other important changes:
¶ Under new IRC §1045, taxpayers selling qualified small business stock may elect to roll over the gain if the proceeds are reinvested within 60 days in other such stock.
¶ Rules governing home office deductions have been liberalized;
¶ For tax years beginning after 1997, the AMT will be repealed with respect to small corporations (i.e., not more than $5 million in gross receipts for 3-year period beginning Dec. 31, 1994).
¶ The carryback period for NOLs will be reduced from three years to two years, but the carryforward period will be increased from 15 years to 20 years;
¶ Not all sales and exchanges of capital assets in business transactions qualify for the new lower rates. Thus, the new tax rates do not apply to (1) long-term capital gains attributable to most depreciable real property (i.e., “section 1250” property) to the extent of all depreciation claimed. Those gains will be taxed at 25 percent; (2) any property held for 18 months or less; (3) gain from “collectibles” (i.e., works of art, stamps, and coins); and (4) gain from the sale of qualified small business stock which already benefitted from the 50% exclusion from gain provided for by IRC § 1202.
¶ Self-employed individuals will be allowed to deduct a greater percentage of health insurance costs. The current 40% deduction will increase to 60% by 2002 and to 100% by 2007. Note that the adjustment is to AGI and does operate to reduce self-employment tax.
¶ Tax laws affecting partnerships have been changed: first, basis adjustments among distributed assets must now be allocated first to unrealized receivables and inventory; second, upon the sale or exchange of a partnership interest, amounts received that are attributable to unrealized receivables or inventory will generate ordinary income. Under prior law, inventory that had not substantially appreciated generated capital gain; and third, the partnership tax year will now close on the death of a partner. Income accruing until date of death will be reported on the decedent’s final return, rather than the return of the estate.
¶ Corporate tax laws affecting exchanges and reorganizations have been changed. Effective for transactions after June 8, 1997, nonqualified preferred stock received by a taxpayer in a § 351 exchange will be treated as boot, rather than stock, and the taxpayer must recognize gain to the extent of boot received. Nonqualified preferred stock is any stock that (1) is limited and preferred as to dividends; (2) does not participate in corporate growth to any significant extent; and (3) is either required to be redeemed, or is likely to be redeemed within 20 years from issue date.
¶ Effective for leases entered into after Aug. 5, 1997, new IRC § 110 provides that amounts received in cash (or treated as a rent reduction) by a tenant under a lease involving “retail space” of 15 years or less, for the purpose of constructing improvements in the tenant’s business, will be excluded from income.
¶ Beginning in 1998, family-owned businesses will benefit from a $1.3 million exclusion from estate tax. This amount, which includes the unified credit, will remain constant as the unified credit increases. To qualify, the value of the business must exceed 50% of the estate, and material participation requirements must be met.