A Plethora of Benefits for the Little Guy

Congress approved a variety of tax breaks and health benefits last week that affect small business. Here’s a rundown on the measures, which are expected to be signed into law by President Clinton:

Expense deductions: The $17,500 annual deduction for business expenses was raised to $25,000 for any business with fewer than $200,000 in equipment expenses in a year. The deduction begins next year with a $500 hike to $18,000 and increases annually until 2003. The measure, the top priority of nearly 2,000 business owners at the White House Conference on Small Business last year, means small firms can get a quick write-off instead of relying on amortization to expand and invest in needed equipment.

Health insurance deductions: The self-employed, who currently can deduct 30% of health insurance costs, will be able to deduct 80% of their costs by 2006. The deductions are to be phased in, starting at 40% in 1997. With an estimated 22 million self-employed people nationwide, this is the single biggest tax break affecting small business.

Medical savings accounts: Workers at companies with fewer than 50 employees can open tax-free medical savings accounts. Employers would first convert traditional medical insurance policies to catastrophic-illness plans. The money saved would go into the savings plan, with the balance carrying over year to year.

Only 750,000 such policies will be written nationwide when the experiment starts next year.

Pension reform: A handful of provisions to encourage retirement savings start next year, including the Savings Incentive Match Plan for Employees, or Simple, which would decrease attorney costs, often totaling $2,000, and paperwork to set up employee individual retirement accounts. The measure is for firms with fewer than 100 employees.

Work opportunities tax credit: Employers can get a tax credit of 35% of the first $6,000 of an employee’s wages for workers in seven categories: former felons, vocational rehabilitation referrals, youths in summer jobs, high-risk youths, veterans on food stamps, 18-to-24-year-olds in families receiving food stamps and those on Temporary Assistance for Needy Families (formerly Aid to Families With Dependent Children). The benefit begins Oct. 1.

Small-business lobbyists say few small, independent firms will take advantage of the benefit because of the paperwork involved, but franchisers, another category of small business, may more readily use it because they have corporate support systems to help with paperwork.

Employer-provided educational assistance: Workers who receive up to $5,250 a year for employer-paid undergraduate, technical and vocational education no longer have to declare the payments as taxable income. The measure exempts benefits paid from Jan. 1, 1995, through June 30, 1996, for graduate assistance and through May 31, 1997, for undergraduate aid.

Social Security tip credit: Beginning Jan. 1, employers running restaurants and fast-food operations get a tax credit on Social Security taxes paid for tipped delivery workers. Employers can receive credit retroactive to Jan. 1, 1994.

S-corporation reform: To make capital investment easier for small companies, a series of measures go into effect in 1997. They include modifying the tax code so that companies are taxed at the same rate as individuals; increasing the number of S-corporation shareholders from 35 to 75; giving certain trusts the ability to own S-corporation stocks; allowing S-corporations to own 100% of another corporation by lifting the current 80% ownership limit; and permitting small banks, tax-exempt organizations and retirement plans to hold S-corporation stock.

Orphan drug tax credit: Biotechnology companies, the majority of them small firms, will continue to receive a tax credit equal to up to half their costs for research and clinical testing of drugs designed for patient populations of fewer than 250,000 individuals, and the tax credit can now be carried forward 15 years. Biotech lobbyists say the measure assures that research into rare diseases will continue.