By Cliff Ennico
Here are some more tax breaks America's small businesses really need.
Make the Health Insurance Premium Deduction Permanent.
There was one good provision in the Small Business Jobs Act of 2010, but it didn't go far enough. While small business owners have always been able to deduct the premiums for health insurance they provide for their W-2 employees, they have traditionally not been able to deduct premiums on the health insurance they provide for themselves and their families. The 2010 Act allows a deduction for business owners' health insurance, but only for the 2010 tax year.
Since most small business owners work in their own businesses, there is no justification for distinguishing between owner-employees and nonowner-employees. The deduction for health insurance premiums for small business owners should be made permanent.
Make All "Start-Up" Expenses Fully Deductible.
It used to be that expenses incurred in starting up a business (as opposed to recurring operating expenses once the business was established) could not be deducted. Instead, they had to be amortized (written off) over a period of up to five years. In 2003, Congress changed the law (thank you, George W.) to allow an outright deduction for the first $5,000 of business start up expenses. Because the legal, accounting and other professional fees incurred in starting up a small business often eat up half or more of that amount, why not simply allow an unlimited deduction for business start up expenses?
Eliminate the Restrictions on 401(K) Rollovers for Business Startups.
With banks not lending and people not saving the way they should, often the only place an entrepreneur can find money to start a business is his 401(k) or other retirement account with a former employer. A loophole in the tax laws allows entrepreneurs to do this - basically the entrepreneur sets up a new "C" corporation with a profit sharing plan, "rolls over" his 401(k) balance into the profit sharing plan, and then has the plan purchase stock in the new business. A number of companies (such as Benetrends Inc.,
) help entrepreneurs tap into their 401(k) funds legally, but charge oodles of money for doing so.
Last year the IRS announced that such "rollovers as business startups" (or R.O.B.S., a telling acronym if ever there were one) would be carefully scrutinized for compliance with federal pension law. Among other things, the IRS said that a profit sharing plan into which 401(k) funds are "rolled over" must be made available on equal terms to all employees of the new business, not just the company founder. This means that entrepreneurs using 401(k) rollover money will need to spend thousands of dollars each year to make sure their profit sharing plans comply with the law.
With millions of laid-off corporate employees unable to find work, and realizing that their only hope of paying for retirement is to start a business of their own, there is no justification for prohibiting them from tapping a retirement account without tax or penalty to finance the business startup. The IRS should back off on R.O.B.S. transactions, and allow 401(k) rollovers as long as the proceeds are invested directly in a new business within 90 days of withdrawal. That would eliminate the need for entrepreneurs to maintain expensive profit sharing plans, and save them thousands of dollars in annual compliance fees.
Eliminate Taxes on IRA and SEP-IRA Withdrawals for "Bona Fide" Business Purposes.
Likewise, the rules on permitted withdrawals from IRA and SEP-IRA accounts before age 59-1/2 should be changed to allow withdrawals without tax or penalty if the proceeds are invested in a new business within 90 days of withdrawal.
Allow Deductions for "Career Change" Educational Expenses.
Under current law, you can deduct tuition and other costs if you take a class designed to help you improve your performance in your current job. But you can’t deduct any costs of classes that train or qualify you for a "new trade or business".
Given that millions of unemployed Americans will have to learn new skills in order to survive in a fast changing, competitive job market (yesterday's financial executive may be tomorrow’s yoga instructor), this restriction on deductibility no longer makes sense and should be eliminated.
What about the cost to the Treasury of these tax breaks, you may ask? Yes, some of these changes would cost the Government quite a bundle in tax revenue over the short term. But you know what? Passing these would reduce dependency on Government programs such as Medicare (or make them applicable to a much smaller number of people). Someone will have to crunch the numbers, of course, but I think overall these breaks would have the long-term effect of reducing Government expenses.
And think of all the additional income tax the Treasury could collect on fast growing, successful businesses that no longer need tax breaks . . .
) is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at
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