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
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
a "C corporation" -- a large corporation with unlimited numbers of
"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
from 35 to 75. The types of trusts qualifying as S corporations has
been expanded to include an "electing small business trust," he
"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. …