1997 Tax Strategies

Article excerpt

While most business firms and individuals are just now gearing up for the April 15 income tax deadline, it's important to adjust strategies and investments for tax changes going into effect this year.

Federal tax changes enacted last year can make a significant difference for small business firms and individuals in the future, said David Greenwell, a certified public accountant who works with Ernst & Young in Oklahoma City. The changes include S corporations, capital asset depreciation, research tax credits, retirement plans and health insurance deductions.

These stem from the Small Business Job Protection Act, the Tax Bill of Rights Act, the Health Insurance Portability and Accountability Act and the Personal Responsibility and Work Opportunity Reconciliation, or welfare reform. Here are details: "Subchapter S of the Internal Revenue Code was reformed after much debate and delay," said Greenwell, who works with business firms and individuals. "The amendments were designed to result in greater tax neutrality between S Corporations and other pass through entities such as partnerships. "The S corporation code was established earlier to allow small business owners the protection of a corporation from liability without double taxation -- the taxation of corporation profits and of the dividends paid to shareholders. Now, the potential of S corporations has been expanded." One of the most important changes allows S corporations to hold subsidiaries. Previously, S corporations were prohibited from owning stock in other S corporations or more than 80 percent of the stock in a "C corporation" -- a large corporation with unlimited numbers of stockholders. "This provides a substantial advantage to S corporations that seek the operational benefit of segregating assets and liabilities of certain business or activities from others," Greenwell pointed out. "Beyond that, allowing S corporations to have wholly-owned subsidiaries will enhance the potential of a small business firm operating multiple entities while saving on administrative costs. "The result could be increased efficiency for small business firms that have or plan a variety of operations." In addition, the new flexibility of S corporations is reflected in the increase in the number of shareholders allowed for S corporations from 35 to 75. The types of trusts qualifying as S corporations has been expanded to include an "electing small business trust," he said. "Further, testamentary trusts may hold S corporation stock for two years after the death of an individual shareholder," Greenwell said. "That's up from 60 days. These changes will be extremely helpful in estate and gift tax planning." Another recent change involves banks and their shareholders. Banks can now become S corporations, provided they do not use the reserve method of accounting for bad debts under Section 585 of the Internal Revenue Code. This could significantly minimize the combined tax rate of banks and their shareholders, Greenwell said, and a "great number of family-owned banks" already have decided to become S corporations. …