What will you give to the IRS this year? - tax-code changes for business and personal tax returns

Nation's Business, March, 1991 by Joan C. Szabo

What Will You Give To The IRS This Year?

As the April 15 tax-filing deadline approaches, individuals as well as business people face a number of tax changes that will affect their 1990 returns.

Some changes mean higher taxes for individuals and businesses, and others represent attempts by the Internal Revenue Service to clarify or simplify existing procedures.

Each year since the enactment of the sweeping Tax Reform Act of 1986, Congress has passed additional tax changes that have made planning difficult for taxpayers. That is why it is more important than ever to stay abreast of these developments and their impact on both your personal financial affairs and your business.

To help you do that, we list here some of the most significant changes that will affect your 1990 return.

Self-employed taxpayers. Self-employed taxpayers pay Social Security/Medicare taxes at a rate of 15.3 percent, which is equal to the combined employmer-employee tax payment for those employed by others. For 1990, the maximum amount of net self-employment income subject to the tax is $51,300.

Now, for the first time, the self-employment tax is partially deductible. On their returns for 1990, the self-employed may either deduct 50 percent of the self-employment tax paid in 1990 or reduce taxable self-employment earnings by 7.65 percent. Income subject to taxation includes the amount paid in Social Security taxes. Although a taxpayer working for an employer pays income taxes on the amount deducted from wages for Social Security taxes, the employer payment is not considered taxable income to the worker. The full amount of the self-employed tax had been subject to income taxes. The change is designed to give the self-employed a break on that portion of the tax that would represent the employer portion in an employer-employee situation.

Subchapter S corporations. For a business organized as an S corporation, a major change on the 1990 return relates to reconciling the company's income as reported on its financial statement and the income reported on the tax return. The IRS now has included a new form, Schedule M1, as part of the 1990 return for S corporations. Schedule M1 is similar to the schedule previously provided to regular corporations.

The purpose of the new schedule, says Robert Franco, a partner with the Washington, D.C., office of Price Waterhouse, is to reflect more accurately the balance in a company's accumulated adjustment account, or the "triple-A." This account represents the amount of money an owner of an S corporation can distribute to shareholders tax-free.

An S corporation's earnings are not taxed at the corporate level. Instead, income passes to shareholders in proportion to their ownership of the firm, and it is taxed at personal-income rates.

"It is critical for a business owner to know the amount of money in the triple-A at all times," says Franco. In the past, many triple-As were kept inaccurately, which meant that a business owner did not know how much tax-free money could be paid to shareholders. "The change will not raise or lower the amount of tax a company pays," Franco says. "It is simply designed to eliminate previous confusion regarding triple-As."

Business use of cellular phones. If you use a celluar phone for business and plan to take accelerated depreciation deductions for this type of equipment, you must have records sufficient to substantiate business use. To qualify for business use, the phone must be used for business purposes more than 50 percent of the time. Review your bills to identify calls made for business rather than personal purposes, and calculate the time the phone was used for business.

Home electronics products. Manufacturers and improters of home electronics products and other goods made with chlorofluorocarbons are subject to a tax based on the amount of such chemicals in the products. The tax is intended to discourage the use of chlorofluorocarbons, which are said by some to cause depletion of Earth's protective ozone layer. The chemicals are used by some companies in manufacturing products such as videocassette recorders, televisions, calculators, cameras, answering machines, and computers. The tax is applied to U.S. manufacturers using these chemicals since Jan. 1, 1990, and to direct importers--and certain retailers--of goods made with the chemicals.

The Alternative Minimum Tax. The corporate alternative minimum tax (AMT) has been overhauled. Corporations now must do an adjusted current earnings (ACE) calculation when figuring the AMT on 1990 returns. The AMT is a separate tax computation required in addition to the regular income-tax calculation. Corporations pay the higher of the two calculations.

"The IRS has come up with a completely different method of computing depreciation when calculating the AMT," says Ricahrd Jones, a partner with the accounting firm of Ernst & Young in Seattle. In addition, the new computation is more complex than the prior method, he says. "It is sure to cause a good deal of frustration on the part of corporations."