Business Taxation under RRA '93

By Green, Gary L., Jr. | The National Public Accountant, November 1993 | Go to article overview

Business Taxation under RRA '93


Green, Gary L., Jr., The National Public Accountant


The Revenue Reconciliation Act of 1993 has made substantial changes to the tax landscape of many businesses. For business, especially small business, the new law has created unique opportunities for competitive growth. To assist you in understanding the new burdens businesses face in complying with RRA '93, this comprehensive summary of the business provisions will reduce the new law to its simplest elements.

Tax Savings or Short-Term Return

Prior to RRA '93, businesses could elect to deduct as an expense, rather than to depreciate, up to $10,000 of the purchase cost for tangible personal property placed into service during the taxable year (the exception was noncorporate lessors). The 1993 Act raises the ceiling for the annual expense election to $17,500. If the purchase of depreciable equipment exceeds $200,000, the $17,500 expensing allowance is reduced (but not below zero) at a rate of $1 for each dollar in excess of $200,000. Accordingly, no section 179 is available if total purchases exceed $217,500. This higher ceiling is retroactive to January 1, 1993.

This change has created the possibility of a short-term return on capital. Expensing $10,000 of equipment in the remaining part of 1993 will give a business owner a tax savings of $2,800 (assuming 28% marginal rate), but expensing $17,500 can give this same business owner $4,900 (an additional $2,100) six to eight weeks after the business tax return is filed. For businesses short on capital for equipment or in sudden need of a new piece of equipment, this change could help retain the competitive edge. The tax refund, received five to seven months later (assuming an October or November purchase and a February filing date), can be used to either invest in new capital equipment or pay-off the short-term note created to offset the immediate capital deficit. Either of these options provides more productive equipment for the business than would have been available under pre-'93 provisions.

Small Business Investment

With prior tax law changes, business investors lost important tax breaks: the capital gain deduction, the alternative tax rate on net capital gains for corporations and the ability to offset earned income (e.g., salary and wage income) by losses from passive investments. Since 1986, capital gain is subject to tax at the same rate as ordinary income, except for individuals and sole proprietorships, who pay a maximum effective tax rate of 28%. For corporations, such gain likewise is taxed as ordinary income, subject to a maximum effective corporate tax rate of 39%.

Although most of the capital gain advantages have been lost, restrictions on capital loss deductions continue in force. For individuals, net capital losses (whether short-term or long-term) can only be used to offset up to $3,000 of income per year. One benefit is that long-term capital losses (including carryovers from pre- 1988 tax years) can offset other income on a one-for-one basis rather than a two-for-one basis. For corporations, capital losses remain deductible only against capital gains. Moreover, unlike individuals who may carry over unused capital losses until fully absorbed, corporations may carry over such losses for only five years; however, a corporation may chose to carry back such losses for three years. Now, there is an additional alternative.

Under RRA '93, classification of income as capital gain has regained some of its importance. The '93 Act provides that a noncorporate taxpayer who holds qualified small business stock (QSBS) purchased after August 10, 1993, for more than five years can exclude from gross income 50% of any gain realized from the sale or exchange of that stock. The exclusion is limited; however, to either: (1) 10 times the taxpayer's basis in the stock; or (2) $10 million in gain from all the taxpayer's transactions in that stock (all must to be held at least five years).

Assume Mr. White purchases 10,000 shares of newly-issued ABC Corporation's QSBS for $7 million at the beginning September, 1993. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Business Taxation under RRA '93
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.