Tax Bill May Include Small-Business Provisions
The tax bill now working its way through Congress may land on President Bush’s desk carrying a provision to make it easier for employers of fewer than 100 people to set up and administer pension plans.
Two other business-friendly proposals also may emerge from the process: one to make health insurance premiums 100% deductible this year for the self-employed and the other to broaden the number of small businesses eligible to use cash-basis accounting for income tax purposes.
Bush wants a clean bill focusing on marginal tax rates, the centerpiece of his tax plan. For the moment, the congressional backers of the business-friendly proposals appear ready to go along; they have introduced separate bills covering each idea. But that may change, said Erik Pages, policy director for the National Commission on Entrepreneurship, a Washington lobbying group funded by the Kauffman Center for Entrepreneurial Leadership.
“I think the bill is going to come out of the Senate festooned with provisions for business,” Pages said. “The most important part of the bill will be the reductions in individual tax rates, which zipped through the House. But Congress is not known for speed in putting together tax bills, and the longer this gets drawn out and the dicier the economic situation, the weaker the case for ramming the thing through--and that leaves more and more room for changes.”
That may mean good news for business owners.
If passed into law, the pension-plan idea would affect millions of businesses and their employees. According to the National Federation of Independent Business, nine out of 10 private-sector workers in the U.S. get their paychecks from companies employing fewer than 20 people, and eight out of 10 U.S. businesses employing fewer than 100 workers offer no pension plan.
Legislation written by Reps. Roy Blunt (R-Mo.) and Ken Bentsen (D-Texas) would create a new kind of pension, a “qualified small-employer plan,” available only to businesses employing fewer than 100 people.
The bill would:
* Give small-business employers tax credits totaling $5,000 to defray the costs of setting up and administering a plan, to a maximum of $2,000 in the first year and $1,000 in each of the next three years.
* Ease the reporting and paperwork burdens associated with pension plans, particularly for companies employing fewer than 25 people.
Of the two provisions, the latter might well prove more important to small businesses. The costs of setting up and administering pension plans are deductible as ordinary business expenses already, so a tax credit improves matters only for companies whose costs give them deductions of less value than the credit. The reporting and paperwork burdens now in place, on the other hand, lead many small businesses to forgo setting up a plan in the first place.
Similar legislation by Reps. Rob Portman (R-Ohio) and Benjamin L. Cardin (D-Md.) seeks to streamline pension plan regulations, speed vesting schedules for 401(k) plans and raise the annual contribution limits on IRAs from $2,000 to $5,000 over the next three years.
The proposal to make health insurance premiums 100% deductible this year for the self-employed may prove only marginally important. Current law allows the self-employed to deduct 60% of the cost of health insurance this year, increasing to 100% by 2003. Separate bills written by Sen. Christopher S. Bond (R-Mo.) would speed the timetable, making such premiums wholly deductible for the 2001 tax year.
The proposal to broaden the number of small businesses eligible to use cash-basis accounting for income tax purposes is largely technical but important to small businesses nonetheless. Written by Bond and California Rep. Wally Herger (R-Marysville), the bill seeks to clarify the threshold at which businesses must switch from cash-basis to accrual-basis accounting.
Under current law, businesses reach that threshold once revenue averages $5 million over three years, but the rules governing exactly what that means are, as Pages puts it, “squishy,” making it difficult for business owners to know how to follow them.
In general, however, the differences between cash-basis and accrual-basis accounting hold important consequences come tax time. Cash-basis businesses, which include most sole proprietorships, record income when received and expenses when paid. Accrual-basis businesses record income when earned and expenses when incurred. Put another way, a cash-basis business pulls the trigger when money actually changes hands--that is, when it receives a check or pays an invoice. An accrual-basis business records income when it invoices a customer and sometimes even when it signs a contract to provide goods or services. It incurs an expense when it agrees to buy goods or services, no matter when money actually changes hands.
In the practical world of business, cash-basis businesses time income and expenses to suit their tax needs--for example, by putting off invoicing their customers until the new tax year begins or, conversely, by speeding payment to their suppliers before the year ends.
Thus the Bond-Herger legislation, by broadening the number of businesses eligible to do this, could ease the tax burden on countless small businesses.
Recent Financing & Insurance columns are available at https://www.latimes.com/finin. Juan Hovey can be reached at (805) 492-7909 or at jhovey@gte.net.
