In late August 1996, Congress and the President enacted three bills that brought significant tax changes. These bills are:

• The Small Business Job Protection Act (The Business Act)
  
• The Health Insurance Portability and Accountability Act (The Health Act)
  
• The Personal Responsibility and Work Opportunity Reconciliation Act (The Welfare Act)

A number of provisions of the various acts were effective on the date of enactment (August 1996) and some will be effective retroactively. Below is a summary of the various changes:

Business Tax Changes

• Increased Code Section 179 expensing amount
  
• Increased deduction for self-employed health insurance costs
  
• Liberalized rules for businesses and investors hit by Presidentially declared disasters
  
• Tax break for landlords that abandon or dispose of leasehold improvements
  
• Home office deduction allowed retroactively for inventory storage

S Corporation Issues

• Increase in the number of permissible shareholders
  
• More trusts may own S corporation stock
  
• Lengthening of trust's holding period after death
  
• IRS may waive invalid S Corporation elections
  
• Repeal of unified audit rules
• S Corporations can have subsidiaries
  
• Changed treatment of S Corporation as a shareholder in another corporation
  
• No basis step up in inherited S Corporation stock for value
  attributable to income in respect of a decedent
  
• New S Corporation elections without waiting five years

Extenders

• Work opportunity tax credit replaces expired targeted jobs credit
  
• Employer provided education assistance revived retroactive to expiration
  
• Research tax credit reinstated, but not retroactive to its expiration
  
• Fair Market Value (FMV) deductions restored for donations of qualified appreciated stock, but not fully retroactive
  
• Orphan drug credit revived

Payroll Taxes

• Major overhaul for Section 530 relief from reclassification of workers as employees
  
• Delay in implementation of electronic funds transfer system
  
• FICA tip credit liberalized; unfavorable temporary regulation reversed
  
• Newspaper distributors and carriers retroactively treated as direct sellers

Individual Tax Changes

• Personal injury damages exclusion narrowed
  
• New adoption credit and exclusion
  
• New tax-deferred college savings vehicle
  
• Expatriation provisions toughened

Earned Income Credit

• No earned income credit for individuals not authorized to be employed in the U.S.
  
• Change to earned income credit disqualified income test
  
• New definition of Adjusted Gross Income (AGI) for phase out of credit

Qualified Retirement Plans

• Changes to qualified plan distribution rules
  
• Suspension of excise tax on excess distributions
  
• Smaller employers can set up new SIMPLE retirement plans
  
• Salary reduction SEP (SARSEPs) repealed
  
• Simpler definition of highly compensated employee
  
• Family aggregation rules repealed
  
• Additional participation requirement eliminated for defined contribution plans
  
• 401(k) and matching contribution nondiscrimination rules simplified
  
• New definition of compensation for qualified plan purposes
  
• Repeal of Internal Revenue Code Section 415(e) combined limit
  
• Treatment of leased employees

Individual Retirement Accounts

• Full IRA contribution permitted for each spouse
  
• IRA payouts for medical expenses exempt from 10% penalty
  
• 10% penalty tax exemption for medical insurance  
  withdrawals by the unemployed

Medical Savings Accounts

• New tax favored medical savings accounts explained

Insurance and Related Provisions

• Long-term care insurance and services treated as medical expense
  
• Tax breaks for accelerated death benefits for the terminally or chronically ill insured. (These are commonly known as viatical settlements. There was a very detailed and well-written article on the impact of this pending legislation in the August 15, 1996 Wall Street Journal, Part C.)
  
• New portability requirements for group health plans
  
• Duration of COBRA coverage

Remember that these are just highlights. There are many other changes that are somewhat more industry/business specific, and some that are just plain esoteric (such as the provision about contributions in aid of construction made to a water or sewerage disposal utility). I'll be talking about many of the more "common" of these issues in the days and weeks to come.

- Article 28

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