Small Business Tax Changes May be on the Way

If Democratic congresswoman and Chair of the House Committee on Small Business, Nydia M. Velazquez (NY-12), and five of her colleagues have their way, the lives of small business owners could be a little bit easier next year. 

Velazquez has sponsored legislation called Small Business Tax Modernization Act of 2008 (H.R. 6601). Currently, this straightforward, pro-business piece of embryonic legislation is before the House Ways and Means Committee, where it will be debated, worked over, raked across the coals, testified for and against, dissected and reassembled with parts from some dark, legislative graveyard until the chairman screams “Its alive! It’s alive!” and they have no choice but to introduce it to the full House of Representatives, where the process will begin all over again. The summary of the bill, as introduced, reads as follows: 

Small Business Tax Modernization Act of 2008 - Amends Internal Revenue Code provisions affecting small business taxpayers to: (1) allow an alternative standard tax deduction for the business use of a personal residence and establish a de minimis standard for determining personal use; (2) repeal restrictions on the depreciation deduction for cellular telephones and similar telecommunications equipment; (3) allow nonresident aliens to be S corporation shareholders; (4) increase the limit on the tax deduction for business meals and entertainment expenses; and (5) allow accelerated depreciation for energy-efficient heating, ventilation, air conditioning, or commercial refrigeration systems installed in nonresidential and residential rental buildings before January 1, 2012. 

The alternative standard deduction is the lesser of $2000 or the gross income derived from the individual's trade or business for which such use occurs. The de minimis standard for determining personal use is a change to the tax code that says personal use shall not be taken into account if such use is so small as to make accounting for it unreasonable or administratively impracticable, effectively relaxing the standard for personal use of a home office. The repeal on depreciation on cell phones and the change to allow nonresident aliens to be S corporation shareholders are changes to existing legislative language. The meal and entertainment deductions will rise from 50% to 75% to tax year 2008 and from 50% to 80% thereafter. Qualified small businesses are any corporation or partnership which meets the gross receipts test of section 448(c) for the preceding taxable year, and any sole proprietorship which would meet such test if such proprietorship were a corporation. 

Regarding the accelerated depreciation section, there will be a 20-year recovery period for highly efficient HVAC&R equipment with Subparagraph (F) of section 168(e)(3) of the Internal Revenue Code of 1986 (relating to 20-year property) being amended so that the term 20-year property means the initial clearing and grading land improvements with respect to any electric utility transmission and distribution plant, and any property which is part of a heating, ventilation, air conditioning, or commercial refrigeration system, which exceeds by at least 10 percent the applicable minimum performance standard for such system or component under the National Appliance Energy Conservation Act of 1987, the Energy Policy Act of 2005, or the American Society of Heating, Refrigerating and Air-conditioning Engineers Standard 90.1, which is installed on or in a building which is nonresidential real property or residential rental property,

the original use of which commences with the taxpayer (the owner or lessor in the case of residential rental property), and which is placed in service before January 1, 2012. 

The bill also mentions a 25-year recovery period for certain other HVAC&R equipment. Here, Section 168(e)(3) of the Internal Revenue Code of 1986 is amended by inserting after subparagraph (F) a new subparagraph that the term 25-year property to mean property which is part of a heating, ventilation, air conditioning, or commercial refrigeration system, which is not described in subparagraph (F), which is installed on or in a building which is nonresidential real property or residential rental property, the original use of which commences with the taxpayer (the owner or lessor in the case of residential rental property), and which is placed in service before January 1, 2012. 

According to Velazquez, the measure is necessary because while it is true that the economic stimulus package passed earlier this year increased consumer spending, the economy is still suffering as the housing meltdown, high energy costs and other problems weigh it down. “American entrepreneurs of the 21st century are ready to lead the way to financial recovery, but our tax system is so out-of-date that many can’t take full advantage of the opportunities before them. By modernizing the tax code to keep pace with today’s realties, we’re giving small firms the right tools and ensuring they keep America at the forefront of the global marketplace.” 

You have to welcome such a clearly pro-small business piece of legislation from this Congress. By streamlining these tax issues for small businesses and offering the nation’s entrepreneurs great flexibility through regulatory changes that put more money in the pockets of small business owners, they are doing more to encourage the sluggish economy and address the growing unemployment rate than anyone expected from Congress this term. This little gem has just begun its journey from concept to law. We’ll keep you posted on how it does.