Abstract
The Internal Revenue Service has in the last year proposed a number of rules potentially damaging to small businesses. Perhaps the most damaging rule, as proposed initially, is one distinguishing for tax purposes between debt and equity contributions to a corporation's capital. The proposed rule would reduce the potential for tax abuse and litigation, but would also eliminate legitimate tax deductions claimed by small businesses in the past. The “debt-equity” rule is analyzed below, and refinements are proposed for IRS consideration. These refinements would moderate the adverse effects of this rule on small businesses without compromising its basic objectives.
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