Welcome to tax reform

Nation's Business, Nov, 1986 by Joan C. Szabo

"I wouldn't think of starting a new company without reviewing the use of the S corporation," says McDuffie. S corporation status is "more advantageous than ever," says James C. Godbout, a partner in the Washington national tax office of the Cleveland accounting firm of Ernst & Whinney.

But the S corporation does have limitations. Critics say that distributed earnings are rarely available later for reinvestment in the company, so a key source of expansion funds is eliminated. In addition, an S corporation is restricted to 35 shareholders.

Liquidations: In the past, small business owners could liquidate a company with minimal tax consequences. When a company was sold and the proceeds went to shareholders, they were responsible for paying tax. The corporation itself paid none. Under the new law, there is double taxation--the corporation must also pay taxes. The change goes into effect next year, but closely held corporations valued at less than $5 million will not be affected until 1989. There is partial relief from the change for companies in the $5 million to $10 million category over the next two years.

No wonder smaller firms are turning to tax professionals.

Rep. David O'B. Martin (R-N.Y.) believes that "it will be well into the next millenium before we truly understand what this document does."

Seidman & Seidman's Borini takes an equally long-range view of how much the law's complexity will require businesses to seek expert help: "I hope my children become accountants."