January 2001

Anti–Small Business Tax Rule Repealed

Thousands of business owners who once worried about huge tax liabilities in selling their businesses are breathing a sigh of relief after President Clinton signed legislation in December repealing the Internal Revenue Service’s tax rule that penalized small business taxpayers that account for business sales with the accrual method.

The legislation, passed by the House and Senate on Dec. 15, was one of the final bills passed before Congress adjourned for the year. It reinstates a tax rule allowing capital gains taxes to be paid in annual installments when a business sale is structured that way.

Titled the Installment Tax Correction Act of 2000, the legislation was sponsored by House Ways and Means Committee member Wally Herger (R—Calif.). It passed by voice vote in the House and by unanimous consent in the Senate before finding its way to the President’s desk.

Under the original law, enacted in December of last year, taxes on such sales had to be paid in a lump sum no matter when payment was to be made to the seller.

“We heard an outcry almost immediately after this went into effect,” said Rep. John Sweeney (R—N.Y.).

The new legislation, signed by President Clinton on Dec. 28, essentially restores the treatment of these sales to the rules in effect before Dec. 17, 1999. The law is retroactive to the enactment of the 1999 bill, so no sales of small businesses in 2000 were affected.

The repeal was immediately lauded by the American Institute of CPAs, which alerted officials of the various state CPA societies the day after the president signed the legislation.

Other groups, including the National Association of Professional Insurance Agents (PIA), hailed the repeal as a major victory for fairness to the owners of small businesses throughout the nation.

“Repeal of this onerous tax provision was PIA’s number one legislative priority this year,” said Sheila Greenwood, PIA assistant vice president of government affairs.

The prior legislation originally closed a loophole that some government officials felt unduly benefited many large corporations and partly helped pay for other tax relief.

The installment sales tax provisions were included in the Ticket to Work and Work Incentives Act of 1999. The provisions had effectively repealed the installment method of accounting for accrual basis taxpayers, forcing small business owners to pay taxes on the sale of their businesses all at once, even if the proceeds of the sale were received in installments over several years.

The tax provision was originally designed to target larger accrual method businesses when they sold particular assets or a portion of their ongoing concern. Its impact on small businesses was an unintended consequence of the legislation.

Last year’s legislation was met with criticism from the tax professional community. David A. Lifson, former vice president of the New York State Society of CPAs and a member of the Finance Committee, characterized the rule in March as one that was “killing the sales of small businesses.”

Early in 2000, the IRS and Treasury Department attempted to correct this unintended consequence by issuing new regulations that exempted the sale of small businesses.

Though occurring without much fanfare, Clinton’s signing of the legislation did coincide with his announcement that the US government is projected to pay down $237 billion in debt in 2001.

“When I took office, our nation’s debt was projected to be $6.4 trillion this year,” said Clinton on Dec. 28. “It will be 31 percent of our annual gross national product. In 1993, it was 50 percent of our gross national product.”