Business Glossary

landmark federal legislation enacted that made comprehensive changes in the system of U.S. taxation. Among the law's major provisions:
Provisions Affecting Individuals

1. lowered maximum marginal tax rates from 50% to 28% beginning in 1988 and reduced the number of basic tax bracket from 15 to 2-28% and 15%. Also instituted a 5% rate surcharge for highincome taxpayers.
2. eliminated the preferential tax treatment of capital gain. Starting in 1988, all gains realized on asset sales were taxed at ordinary income rates, no matter how long the asset was held.
3. increased the personal exemption to $1,900 in 1987, $1,950 in 1988, and $2,000 in 1989. Phased out exemption for high-income taxpayers.
4. increased the standard deduction, and indexed it to inflation starting in 1989.
5. repealed the deduction for two-earner married couples.
6. repealed income averaging for all taxpayers.
7. repealed the $100 ($200 for couples) dividend exclusion.
8. restricted the deductibility of IRA contributions.
9. mandated the phaseout of consumer interest deductibility by 1991.
10. allowed investment interest expense to be offset against investment income, dollar-for-dollar, without limitation.
11. limited unreimbursed medical expenses that could be deducted to amounts in excess of 7.5% of adjusted gross income.
12. limited the tax deductibility of interest on a first or second home mortgage to the purchase price of the house plus the cost of improvements and amounts used for medical or educational purposes.
13. repealed the deductibility of state and local sales taxes.
14. limited miscellaneous deductions to expenses exceeding 2% of adjusted gross income.
15. limited the deductibility of itemized charitable contributions.
16. strengthened the Alternative Minimum Tax (AMT), and raised the rate to 21%.
17. tightened home office deductions.
18. lowered the deductibility of business entertainment and meal expenses from 100% to 80%.
19. eliminated the benefits of clifford trust and other incomeshifting devices by taxing unearned income over $1,000 on gifts to children under 14 years old at the grantor's tax rate.
20. repealed the tax credit for political contributions.
21. limited the use of losses from passive activity to offsetting income from passive activity.
22. lowered the top rehabilitation tax credit from 25% to 20%.
23. made all unemployment compensation benefits taxable.
24. repealed the deduction for attending investment seminars.
25. eased the rules for exercise of Incentive Stock Option (ISO).
26. imposed new limitations on salary reduction plan and Simplified Employee Pension (SEP) Plans.

Provisions Affecting Business
27. lowered the top corporate tax rate to 34% from 46%, and lowered the number of corporate tax brackets from five to three.
28. applied the Alternative Minimum Tax (AMT) to corporations, and set a 20% rate.
29. repealed the investment tax credit for property placed in service after 1985.
30. altered the method of calculating depreciation.
31. limited the deductibility of charges to bad debt reserves to financial institutions with less than $500 million in assets.
32. extended the research and development tax credit, but lowered the rate from 25% to 20%.
33. eliminated the deductibility of interest that banks pay to finance tax-exempt securities holdings.
34. eliminated the deductibility of greenmail payments by companies warding off hostile takeover attempts.
35. restricted completed contract method accounting for tax purposes.
36. limited the ability of a company acquiring more than 50% of another firm to use Net Operating Losses to offset taxes.
37. reduced the corporate dividend exclusion from 85% to 80%.
38. restricted tax-exemption on municipal bond to public purpose bond and specified private purpose bond. Imposed caps on the dollar amount of permitted private purpose bonds. Limitedprerefunding. Made interest on certain private purpose bonds subject to the AMT.
39. amended the rules for qualifying as a Real Estate Investment Trust (REIT) and the taxation of REITs.
40. set up tax rules for real estate mortgage investment conduits (REMICs).
41. changed many rules relating to taxation of foreign operations of U.S. multinational companies.
42. liberalized the requirements for employee vesting rules in a company's qualified pension plan, and changed other rules affecting employee benefit plans.
43. enhanced benefit of Subchapter S corporation status.