Tax news to note before April 15

Some IRS changes could leave you feeling richer, while others may make you feel poorer.

By Annie B. Kelleher
Contributing editor to CBIA News

Recent changes in IRS laws and regulations could affect your tax return this year, so you should consult your tax adviser, says Santa Mendoza, CBIA tax specialist. “It’s important to be aware of these changes and whether or not they will have an impact on individual business situations. Three of the changes could indirectly help to reduce your tax liability, if they apply to you. The other three could increase your tax bill,” Mendoza says. 

Good for you?

The IRS, for example, has greatly relaxed the rules for home-office deductions, making it easier for employers, employees and the self-employed to claim this deduction. 

There are three requirements necessary to qualify for this tax deduction: The home office must be used exclusively and regularly for business purposes, be the principal location of business, and be a meeting location for professional contacts. “Exclusively” means the space is used for business purposes only. A space that doubles as a business office and as a bedroom, for example, doesn’t qualify. “Regularly” means the space is used on a continuing basis. A part of a home that’s used as an office only occasionally or incidentally doesn’t qualify, even if the space isn’t used for any personal or other purpose. Check with your tax adviser to see if your home-office space qualifies. 

Another positive change is that small-business owners won’t necessarily have to re-file with the IRS if they wish to change the accounting period or accounting method they use, Mendoza notes. “The IRS has made it easier for small-business owners to make minor adjustments to their accounting procedures. They’ve revised their position on when a [change] notification filing must take place. You can make minor changes without going through a lengthy or cumbersome procedure.” 

And, in a major change related to the laws protecting “innocent spouses,” the IRS has made it possible for spouses who are not involved in the operation of a business owned by their partner to opt out of tax liability for that business. 

Good for the Treasury?

Other changes, however, may leave you feeling a little poorer and the U.S. Treasury a little richer.

Mendoza notes that the IRS has changed the rules concerning favorable tax treatments of family limited partnerships. Under the new rules, these partnerships will no longer receive the preferential tax treatment they enjoyed in the past. 

The IRS also has eliminated the deduction for split-dollar charitable life-insurance arrangements. Previously, premium payments for these policies were deductible. However, the IRS will no longer allow these premiums to be written off as charitable contributions.

Perhaps the most important change to affect small-business owners in 2000 is the elimination of the installment method of reporting the sale of a business or some large asset, such as a building, a parcel of land or equipment. This change might have serious implications if you’re planning such a sale and use accrual-basis accounting. As of July 1, 2000, you will no longer be able to claim as your income only the portion of the proceeds of the sale that you actually receive during a given tax year. 

Mendoza urges all small-business owners to consult their tax advisers to see if any of these changes affect their tax liability. Also, you’d be wise to double-check the data in your computer’s bookkeeping programs for any Y2K glitches that may not have been immediately apparent. 

Another good idea, if you use the calendar year as your fiscal year, would be to consult your tax adviser again in the fall, when it’s possible to do advance tax planning to avoid last-minute panic next year. “Nine months into the fiscal year, the business owner can see where the business has been and make some educated predictions about where it will end at the year’s conclusion,” Mendoza says. Based on these calculations, you can make decisions that could help lessen your tax liability, as well as improve your budget. 

Finally, remember that there’s never such a thing as too many records. When in doubt, keep the receipt or record in question filed with other tax preparation documents. “It’s always better to be overprepared than underprepared,” Mendoza says. 

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