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The Ire Next Time

Frontier -- Features

The Ire Next Time

Think your 1999 tax return is painful? Wait till you see what's new for 2000

To most people, 1999 seemed a quiet year on the tax front. After all, there was no blockbuster legislation from Capitol Hill or regulatory re-do from the Internal Revenue Service. But if you were trying to buy or sell a business, you'd see things differently. Just ask Ragnar Boresen, 46, the owner of a custom plumbing shop called The Sink Factory in Berkeley, Calif. Boresen had planned to sell the business this year to one of his employees for $900,000. Then, in December, Congress lobbed a tax bomb his way--the "installment sales provision."

Tucked into the utterly unrelated Ticket to Work & Work Incentives Improvement Act of 1999, its purpose was to replace revenues lost through tax cuts. How? By making most owners who sell a business pay their entire capital-gains tax up front even if they're receiving payment on the sale over many years.

For Boresen, it was a deal breaker. He had agreed to take a $125,000 downpayment and the remaining $775,000 over 15 years, assuming he would spread out the taxes on his gain. Now, he had to pay taxes on the whole thing in one shot. "The downpayment wouldn't even cover my tax liability," he says, adding: "It's really unfair to my employee. There's no way he can come up with more."

As every entrepreneur knows, the taxman never really rests. So even in a quiet year, changes are afoot that could have a far-reaching impact on your business. In fact, while Congress was passing the Treasury Dept.-proposed bill--more on that in a minute--the IRS was making plans to step up its auditing of small business. We'll show you how to duck and cover from this new threat and also offer suggestions for making next year less painful.Selling may be hard to do. First, how did the new tax on installment sales come about? You'd think someone would have paid more attention, given that most sales involve installment payments, and the practice dates from 1918. Indeed, many buyers couldn't finance a deal any other way. But the small-business community's Washington agents dropped the ball. "It seemed like a narrow provision that would not affect our membership," says Brian Reardon, manager of federal public policy at the National Federation of Independent Business. Instead, the NFIB now estimates that it could affect some 100,000 small-business sales each year. Pamela F. Olson, incoming chair of the American Bar Assn.'s tax panel, says the new law will likely dampen sales prices of businesses, impede employee buyouts--as Boresen found--and impede passing a business to heirs.

The uproar that followed this realization brought speedy action, if not results. On Mar. 9, the U.S. House of Representatives voted for a repeal bill, introduced by Representative Wally Herger (R-Calif.). But its prospects are far from certain since it was made part of a larger bill that President Clinton has vowed to veto. In the Senate, Sen. Conrad Burns (R-Mont.) has 32 co-sponsors for a similar repeal, but no action is scheduled. The Administration, meanwhile, seems to be willing to tinker with the law. At a House Ways & Means subcommittee hearing on Feb. 29 (there were none before the tax passed), a Treasury official said new rules would be issued to exempt companies with average annual gross receipts of $1 million or less. To go beyond that, he noted, would require a change in the law.The IRS will be watching you. There will be no relief, however, from another quiet development--a move to increase audit rates, which have been falling for years. Small businesses were traditionally an IRS target because they so handily blur personal and business expenses. But for various reasons, including congressional criticism of abusive audits and a lack of manpower, the rates declined. Now it appears that the agency is moving back into the ring. Susan M. Jacksack, author of the CCH Business Owner's Toolkit Tax Guide 2000 (CCH, 1999), observes that the IRS is gearing up its Small Business & Self-Employed Operating Division. "Once this reorganization takes hold later this year, the rules will get tougher and audits more frequent." What's more, the Clinton Administration has proposed a 9% increase in the IRS's budget. Part of that would go toward hiring 633 new auditors. A quiet year? Could be you haven't heard the last of it.Need more advice on taxes for this year or next? Click Online Extras at frontier.businessweek.comBy Lesley AldermanReturn to top

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