By Paul N. Gada, Business Owner's Toolkit Staff Writer

When President George W. Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001 (the Tax Relief Act) into law on June 7, 2001, U.S. taxpayers received a $1.35 trillion tax cut over the next ten years, representing the largest tax cut package in 20 years. Although small business owners as a whole will definitely benefit from the new tax cuts, the specific impact on individual small business owners may vary greatly.

The centerpiece of the Tax Relief Act is a $958 billion consolidation and reduction of the marginal tax rates for individuals beginning in 2001. The new tax rates for the next decade are as follows:

For 2001, most taxpayers will receive the benefit of the new 10 percent tax rate through an advance rate reduction refund check. The amount of the check will be a maximum of $300 for single taxpayers, $600 for married taxpayers filing jointly, and $500 for heads of households based on the filing status you claimed on your 2000 return. If you filed a 2000 tax return, the IRS will automatically provide you with a notice informing you of the amount you will get and send you a check for that amount by the end of 2001. The IRS hopes to send the majority of the checks by the end of October.

Although far from winning a lottery jackpot, the rebate amounts should provide a jolt to the economy and to your small business. Approximately 95 million taxpayers will have an extra $300-$600 burning a hole in their pockets right before the end-of-year holiday buying frenzy. This means 95 million potential customers may soon be looking to spend $300-$600 on the goods or services offered by your business. As a small business owner, you may join the masses of giddy shoppers or, instead, invest your $300-$600 in things like advertising to lure customers to spend their money at your business. Either way, you should definitely see some tangible benefits by the end of this year.

After 2001, the amount of tax relief you experience will depend on the year and the amount of income you have. For 2006 through 2010 when the rate reductions are fully phased in, for example, the projected tax cut for married couples filing jointly would be as follows:

Small business owners--especially those that operate their businesses as sole proprietorships, partnerships and S corporations--will directly benefit from the lowered tax rates. Personal service corporation tax rates remain at a flat 35 percent rate and regular corporation tax rates continue to vary between 15 to 38 percent. With personal income rates moving substantially lower than corporate tax rates, small businesses that are incorporated may reconsider the organizational form of their business in the coming years.

Lower tax rates also mean lower estimated tax payments for you and lower withholding rates for your employees. The latter change in effect allows you to give your employees a raise in their paychecks without having to pay for it.

As for the remaining 400+ new changes to the tax code, some small business owners may find that the Tax Relief Act provides them with no additional tax relief. The impact of the remaining changes can be lumped under three categories: benefits that depend on your situation (e.g. marriage penalty relief, and increased child and dependent care credits), benefits that depend on chance (e.g. becoming subject to the new estate tax laws by dying between now and 2011), and benefits that you choose to take advantage of (e.g. pension reform provisions, retirement savings incentives and education tax cuts).

So for those long-lived small business owners that will remain single and childless over the next decade while refusing to save for retirement or invest in education, the Tax Relief Act won't seem like such a big deal to you. If nothing else, however, you should consider taking advantage of some of the new retirement savings incentives.

Thanks to about 50 provisions of the Tax Relief Act, the next ten years beginning with 2002 will be a great time to save for retirement. Contribution and benefit limits for qualified plans and individual retirement accounts (IRAs) will increase significantly. Those 50 years old and above will also be allowed to make additional catch-up contributions to an IRA. The table below summarizes the contribution increases.

If there are opportunities for you or your business to benefit from the tax changes, take advantage of them as soon as you can because they may not be available down the road. The Tax Relief Act has a built-in sunset provision that will cause the tax code to automatically revert back to its current 2001 version in the year 2011 without additional intervention by Congress. Also, the last time Congress gave a major tax break package, it took only four years before they started eliminating those breaks.

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