Death and taxes

Which is worse — death or taxes? Thomas M. Zaino says the latter doesn’t have to be a hassle for business owners.

Appointed tax commissioner by Gov. Bob Taft in 1999, Zaino oversees 1,300 employees in 11 divisions with nine regional offices and collects $18 billion in state taxes. In his short tenure, the former partner with PricewaterhouseCoopers has helped revamp Ohio’s estate tax administration and has been the champion of technology’s integration in the Ohio Department of Taxation’s filing and collection procedures.

Considering his organization benefits from the taxes Ohioans pay, Zaino’s support of technology tax credits and the simplification of tax rules for the self-employed is very business friendly. SBN Magazine talked with him about new developments in Ohio estate tax processes and other issues that affect Ohio business owners.

What are the most common mistakes business owners make when filing taxes?

Math errors, failure to fully complete forms and appropriate schedules, failure to attach schedules, miscalculating apportionment factors, improper treatment of allocated income, using old or nonexistent account numbers and failure to make timely estimated payments of tax.

We have seen more and more tax changes for self-employed and part-time employees. Do you see this trend continuing?

Last year, the IRS reorganized itself into four business units, one of which is called the Small Business/Self Employed Operating Division. This shows the emphasis that the IRS places on this segment of the taxpaying public. Eventually, changes will be made in either the tax law itself or in how the IRS administers the tax law as it applies to self-employed individuals. I would guess that the changes will simplify compliance with the tax law, rather than the enactment of brand new tax benefits.

Recently, there have been a number of tax breaks directed toward the owners of small businesses. What will their effect be?

In late January, Sen. Chris Bond of Missouri introduced the Small Business Works Act of 2001. It contains a number of provisions designed to help small business. Those include an increase from 60 percent to 100 percent for the deduction for health insurance costs for self-employed individuals. There is also a repeal of the Alternative Minimum Tax (AMT) for individuals after 2004. Between 2001 and 2004, the AMT is reduced by 20 percent each year.

The AMT is a computational nightmare for corporations. In fact, three separate sets of depreciation schedules have to be kept by corporations just to comply. The bill would eliminate the corporate AMT for corporations with gross receipts of less than $7.5 million for the first three years of the computation period, and this amount increases to $10 million thereafter.

The bill would help small businesses stay competitive by making the research credit permanent. It would allow taxpayers with gross receipts of $5 million or less over a three-year computational period to avoid using the accrual method of accounting. Similarly, taxpayers with less than $5 million in gross receipts over the three-year computational period would be able to avoid using inventory accounting.

It also increases the amount of equipment purchases that small businesses may expense each year from the current $24,000 to $50,000, and increases the phase-out threshold from $200,000 to $400,000. And, the bill allows depreciation of computer equipment and computer software over just two years.

There have recently been changes in Ohio’s estate tax law. How will they affect small business owners or family-owned businesses?

The bill affects estates dealing with a date of death on or after Jan. 1, 2001. After that date, as long as a business interest belonging to a descendant meets certain qualifications, the value of that business interest, up to a maximum of $675,000, can be deducted from the value of the descendant’s gross estate for Ohio estate tax purposes. If a qualifying business is passing from generation to generation and the value of that business is under $675,000, that business passes Ohio estate tax free.

The bill also provided a major tax cut of almost $200 million for Ohio families over the next two years. For dates of death on or after Jan. 1, 2001, an estate with a gross value of $200,000 or less does not have to file an Ohio estate tax return and will not pay any Ohio estate tax (the previous threshold was $25,000). This amount increases to $338,000 for dates of death on or after Jan. 1, 2002.

The Alternative Minimum Tax hasn’t been extremely popular. Why do you think that is?

When the individual Alternative Minimum Tax was originally enacted in l969, it was aimed at millionaires who paid no income taxes. Today, it is beginning to hit an unintended target: middle-class taxpayers. In testimony before the Senate Finance Committee on March 8, it was noted that in 2000, the AMT affected 1.3 million taxpayers. In the next decade, that number is expected to jump to 17 million taxpayers.

While the AMT currently targets high-income families, the number of middle-income taxpayers earning between $50,000 and $75,000 a year hit by the AMT would skyrocket from less that 1 percent in 2001 to a whopping 32 percent just 10 years later.

Why the increase in the number of taxpayers who will have to deal with the AMT? Because of the lack of indexing of the AMT rates and exemption amounts, as well as the expiration of temporary tax credits, all of which protect taxpayers from the AMT. Congress will have to do something about this, but the cost in potential lost revenue is quite high. How to reach: Ohio Department of Taxation: (888) 405-4039 or
Kim Palmer ([email protected]) is managing editor of SBN Magazine.