The House Ways and Means Committee has constructed a bipartisan tax proposal to be adopted later this year or in the beginning of 2014 that is designed to specifically aid small business development and growth. The complexity of the present tax code has been consistently made an issue by small business advocates. The aim of the proposed legislation is to make tax code so straightforward that the small business owners can understand and handle their taxes or understand a tax depreciation schedule without the need to hire expensive tax professionals. The main features of this proposal are the following:
1. Start-up Cost Deductions.
The proposal suggests that small businesses and entrepreneurs could deduct up to $10,000 in costs for startups prior to and during the first business year. This doubles the existing allowed deduction and includes every aspect of business development such as:
a. Market research
b. Advertising
c. Employee training
d. Business related travel
e. Legal advice
f. Other essential costs
2. Equipment Deductions.
The centerpiece of the new tax proposal is to increase and make permanent the Section 179 deduction. This is the part of the IRS tax code that allows small companies to invest in themselves through more sizable tax breaks on items like office equipment and business software.
This amendment is considered to be a way for entrepreneurs to better position themselves for growth in the coming years. According to the new proposal the small business owners should be allowed to deduct up to $250,000 of the purchase price paid for the qualifying equipment within one year, as opposed to adhering to the typical 5 to 7 year depreciation schedule. Qualifying equipment generally includes:
a. Computers
b. Machines
c. Furniture
d. Cars
e. Movable equipment
e. Other necessities
To take advantage of this deduction, small businesses will be required to submit a Form 4562.
3. Uniform tax rules.
Another tax proposal aimed at helping small businesses is that tax differentials be minimized or eliminated with regard to the two types of companies – partnerships and S corporations. Those legal structures have similar tax treatment in regards that all profits and loses flow through to their individual partners and shareholders, and the companies do not pay taxes as independent legal entities. But in spite of that partnerships and S corporations are subject to different sets of tax rules. The new legislation is looking to create uniform tax laws that would apply to all non-publicly traded companies.
4. Tax filing deadline.
New tax return filing deadlines would be pushed back for small businesses, which could allow them to ensure that all of the most current deductions are included in their returns. By minimizing their tax liability, these companies may save on costs and invest the funds into the growth of their businesses.
The House Ways and Means Committee has released the draft of tax proposals for public comment. If the Committee proceeds with these proposals, they could become a part of a new tax reform bill. Undoubtedly, this legislation would reduce tax rates for individuals and small businesses while broadening the amounts of allowed deductions. Small business advocates strongly support these proposals. However, they emphasize that lowering overall tax rates would be more advantageous for small businesses than implementation of new rules that still have to prove their viability on practice.
Ekaterina Mouratova is a founder of The Law Firm of Ekaterina Mouratova, PLLC. She focuses her practice on business and corporate law, intellectual property and immigration law. Ekaterina successfully represents domestic and international clients in all aspects of their business and legal climates.
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