Sohodojo Advisory Board Member
Jim Schneider
The Taxman86 Speaks...
03 March 2000
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How to beat the Taxman; First the Marriage Penalty, Then the Seniors, Next Comes Health Care, Education, and Small Business; and Hollywood rides again
1. IRC Section 183 is simple
Are you in a 'tax deductible' business venture, or enjoying a hobby and having fun with your Web site? Can you make a real profit, if successful, by selling something, even a tax program, and can you lose your investment? If you answer yes to both, then IRC Section 183 is satisfied and you are in a business activity. BUT now you must go to IRC Section 469 and make sure you materially participate, which generally means 500 hours or more.
How long can you keep losing? We suggest it is until you close your doors in the New Economy [which may be never if you operate out of your home].
2. The House and Senate have their tax plates full
Yesterday the Senate passed the Affordable Education Act (S.1134), which has many, many tax provisions dealing with education of all sorts, including benefits to teachers, and other things, just as the Bankruptcy Act did earlier with the Small Business tax Cuts. In the Senate, every Senator can make amendments on the floor, and there are many special deals made. (Check out TaxPlanet.com website for this and other small business tax topics.)
Next week the House takes up H.R. 3081, 'The Minimum Wage and Small Business Tax Cut Bill,' which will include a repeal of the repeal of the installment reporting of gains, by accrual method taxpayers adopted by Congress last year. This provision apparently affects over 200,000 small businesses each year [those businesses that are unincorporated and are sold on the installment method (the seller taking back paper from the buyers)] for about $2.5B in taxes over the next five years [1999 to 2004]. (Check out the TaxAnalysts.org website for more on this topic.)
The Education Tax Bill adopted in the Senate passed 61 to 37, the Bankruptcy Act with the Small Business Tax Cuts was basically on a party vote, as may be the Minimum Wage Small Business Tax Cut in the House, suggesting vetoes by President Clinton. It will be real interesting to see how this all plays out, since estate and gift repeal, pension reform, IRC Section 179 expensing and many other small business tax incentives are buried in these Small Business Tax Cut bills. If passed and Vetoed, then it becomes a campaign issue.
We assume that is why these are being brought up now so that by the time the 2000 Congressional Small Business Summit comes in June 2000, House Speaker J. Dennis Hastert will have lots to talk about.
The sleeper in this legislation are the Distressed Community Bills, H.R. 815 and 2848, which appear to have NO political opposition and could pass just like the Senior's Social Security Repeal Act did in the House 422 to 0. Do they apply to home-based businesses we keep being asked, and if so how?
What is a 'Specialized Small Business Investment Company {'SSBIC'],' and why is it important, we were asked yesterday? Why are the President's New Markets Venture Capital Initiative important we were asked? It is because the SBA's definitions of 'Socially and Economically Disadvantaged,' are changing with the New Economy along with the definition of Disadvantaged Communities and the terms 'Enterprise Zone Business' and 'LMIZone Enterprises.'
Today most families have two working parents, not one [if a single parent it most likeley will be a woman], and if these parents are running a home-based business, that is a partnership for tax purposes, or in California, Nevada, Washington, Texas and several other states, Community Property. Those two working parents will also qualify under the SBA's definition of 'Socially and Economically Disadvantaged,' for purposes of SSBICs lending and investment purposes.
Moreover, HUBZones, Empowerment/Enterprise Community and Renewal Zones will be entitled to special tax and financial incentives for businesses within those zones, whether they are owned by the 'Socially and Econimically Disadvantaged' or not, under the President's proposals, if they qualify as 'LMIZone enterprises.'
In short, IF you have a home-based business, owned by a couple, no matter where it is located, it can get attactrive financing from an SSBIC, be it Beverly Hills, Califonia, Redmond, Washington, or the Silicon Valley. On the other hand, if you are willing to locate your business within a HUBZone, an Empowement/Enterprise Community or Renewal Zone [these can be found in most major cities, including Portland, Seattle, Los Angeles, San Diego, Denver, Las Vegas, Phoenix, etc.], it can be owned and operated by anyone.
This can be very confusing to say the least, but help is on its way, as the Taxman86 takes on its second online tax article, this time on the hot topic of venture capital for American VENTURE Magazine, an organization which is located within the Portland, Oregon, Federal Enterprise Community Zone.
3. The Hollywood Studios are alive and well, now they are called DOT-COM Incubators
Leslie Walker of the Washington Post, in her weekly column '.COM' lays it all out on where the DOT-COM incubator movement is going, and it is hot to say the least. It is now called the production line of Dot-Coms, just like the movie studios of old, one a week if you will.
These DOT-COM incubators are being designed to look just like movie studios, with various support things to help out the DOT-COM Companies, including legal, accounting, marketing, financing, etc., for a price, that being 30% to 60% of the DOT-COM Company.
Interestingly enough, however, the Internet may be putting these DOT-COM incubators at a disadvantage since online help is on its way, that does not cost 30% to 60% of the deal. Bigstep.com, Loudcloud.com, BIZBUYER.com, and Capitalkey.com to name a few. [If that does not take all your time, we suggest the March 2000 issue of BUSINESS2.0 for 50 pages of how to do it] Moreover, if the Distressed Communities legislation is passed then the rules will really change.
The next 60 days will be very interesting, to say the least, especially if you are in the stock market and realize large short term capital gains [taxable at 50%], all of which could have been deferred under IRC Section 1044, if reinvested within 180 days, under IRC Section 1044, as proposed in the Distressed Communities Legislation by President Clinton, with strong bipartisan support.
How many tax advisors, who are meeting with their favorite client's to do their 1999 tax returns, have suggested that modications to IRC Section 1044 are pending? We believe ZERO! Do they have an obligation to do so if their client has significant short capital gains for 1999, and is still active in the market?, We think so [epecially if the House passes the Distressed Communities legislation this month]; and if the numbers are big enough, the litigators will be there to clean up these professional errors, as always.
Jim Schneider, LL.M.
Taxman86
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