Masonry Magazine August 1998 Page. 12
Tax Relief... or Headaches?
by Mark E. Battersby
The Taxpayer Relief Act of 1997 will mean smaller tax bills for some mason contractors, but not for all. While no individuals will pay higher income taxes as a result of this legislation, its benefits are "targeted" at select groups. As one of the many groups that are not specifically targeted, owners of masonry businesses may want to take a closer look at the technical details of this legislation in order to see if they will benefit.
While few contractors will benefit, the heirs of those masonry business owners will appreciate that over the next ten years, the unified gift and estate tax credit will be gradually increased so as to be worth $1 million by the year 2006. Even better, after December 31, 1997, family-owned businesses and farms will be eligible for an additional exclusion. Coordinated with the unified credit, this exclusion and credit combined will be worth $1.3 million from this year (1998) on.
That floor is, in essence, the amount over which the credit comes into play. Only those estates, including specially valued small businesses, whose total value and thus its tax bill, is above the amount covered by the tax "credit" floor will feel the bite of taxes.
NOTE: Just for the record, a provision allowing estate tax exclusions for land subject to a conservation easement would stack on top of the legislation's exclusion for family farms. The easement exclusion would phase in by $100,000 increments to $500,000 by 2002.
In addition to increasing the threshold amount for gift and estate taxes and, in reality, increasing the amount that a masonry contractor can pass on to his or her heirs tax-free, the new tax law creates a few benefits that the average contractor can utilize him- or herself today or at least in the foreseeable future.
The alternative minimum tax rules were devised to ensure that at least a minimum amount of income tax is paid by corporate and high-income noncorporate taxpayers who reap large tax savings by making generous use of some tax deductions and exemptions. Without the alternative minimum tax, some of these taxpayers might be able to escape income taxation entirely. In essence, the AMT functions as a recapture mechanism, reclaiming some of the tax breaks primarily available to high-income taxpayers and represents an attempt to maintain tax equality.
A major win for the Republicans was the inclusion in this legislation of a provision that will allow masonry businesses to conform alternative minimum tax (AMT) depreciation lives to the regular tax. This simple, if confusing, provision will cut business taxes by an estimated $6.8 billion over the next five years.
Although incorporated masonry-related businesses currently receive a $40,000 exemption from the AMT, the new legislation exempts smaller businesses from the AMT altogether. The new exemption applies to all businesses with less than $5 million in annual receipts. A senior congressional aide said that this new exemption will allow 90 percent of businesses to avoid the burden of calculating AMT.
Exemptions from AMT for small businesses and repeal of certain depreciation components of the AMT offer relief for primarily capital-intensive corporations. Last year's tax bill also contained some relief for the average masonry contractor.
Under the heading of so-called "small business relief," the new legislation delayed until June 30, 1998, penalties for failing to make Federal payments electronically. Business depositing less than $50,000 in receipts are already exempt from the requirement. That deadline has been further postponed until December 31, 1998.
According to a spokesmen for the U.S. Treasury Department, almost all of those who would be subject to penalties for not filing electronically are already complying. However, as mentioned, the often postponed deadline has been extended, once more, to December 31, 1998.
Perhaps of slightly more use to many masonry contractors, last year's legislation contained a new welfare-to-work tax credit. The wage credit is payable to employers who hire long-term AFDC recipients. It is worth 35 percent of the first $10,000 of wages in the first year of employment. The credit increases to 50 percent of Continued on page 14