The Small Business and Work Opportunity Tax Act of 2007

Posted 6/20/07

A portion of a supplemental spending and minimum wage bill recently signed into law included several tax provisions that may have an impact on you and your business. The Small Business and Work Opportunity Tax Act of 2007 contains $4.8 billion in small business tax breaks — but also includes $4.4 billion in revenue raisers.

Tax Cutting Provisions

Among the tax-saving opportunities presented by the new tax law are the following items.

Section 179 Expensing Deduction.  Under Section 179 of the tax law, business taxpayers may choose to deduct immediately the cost of certain business-related asset purchases, rather than depreciate that cost over time. The deduction is limited to a specified annual amount, and the deduction phases out once annual asset purchases reach a specified level.

The new law increases both the maximum annual expensing amount and the threshold phaseout amount. For tax years beginning in 2007, the practical impact of these changes is to increase the annual expensing limitation from $112,000 to $125,000 and to increase the phaseout amount from $450,000 to $500,000. Also, the law indexes the increased amounts for inflation in tax years beginning in a calendar year after 2007 and before 2011. The Section 179 changes are effective for tax years beginning after December 31, 2006, and before January 1, 2011.

Work Opportunity Tax Credit.  The Work Opportunity Tax Credit (WOTC) may be claimed by employers who hire disadvantaged workers who fall within certain eligible targeted groups. The WOTC is extended 44 months through August 31, 2011, for most targeted groups, effective for individuals who begin work for the employer after May 25, 2007.

The new law also relaxes the requirements for, and renames, the WOTC targeted group called “high-risk youths,” expands the WOTC to cover “Ticket to Work” plan participants, and enhances the WOTC for employing certain disabled veterans, effective for individuals who begin work for the employer after May 25, 2007.

Alternative Minimum Tax (AMT).  The new law does not overhaul the AMT as many had hoped. However, the new law does make clear that the WOTC and the FICA tip credit (typically claimed by restaurants and other food and beverage establishments whose employees earn tips) can offset 100% of AMT liability, effective for WOTCs and FICA tip credits determined in tax years beginning after December 31, 2006, and to carrybacks of those credits.

Spousal Joint Ventures.  Absent a special tax law provision, an unincorporated business owned by a husband and wife could be required to file a tax return as a partnership. Effective for tax years beginning after December 31, 2006, the new law says that, where a qualified joint venture is conducted by a husband and wife who file a joint return for the tax year, the joint venture is not treated as a partnership for tax purposes, if the spouses so elect.

S Corporations.  Several provisions affecting Subchapter S corporations are found in the new law. For instance, capital gains from the sale or exchange of stock are no longer included in the definition of “passive investment income.” Other provisions include an overhaul of the treatment of the sale of an interest in a qualified Subchapter S subsidiary and the elimination of all earnings and profits attributable to pre-1983 years.

Revenue Enhancements

There are some significant tax increases in the new law. Most are administrative in nature, but one in particular will have an impact on many individual taxpayers.

Kiddie Tax.  In general, the revenue code imposes taxes on a young child’s unearned income in excess of $1,700 at the child’s parents’ tax rate. This provision (called the “kiddie tax”) is intended to limit the tax-reduction strategy where parents transfer income-producing assets to a young child so that the income generated will be taxed at the child’s presumably lower tax rate.

A 2006 tax law increased the age at which the kiddie tax applies, from under age 14 to under age 18. Now, the new law modifies that change so that the kiddie tax applies generally to children under 19 years old, effective for tax years beginning after May 25, 2007 (the 2008 tax year, for calendar-year taxpayers). More importantly for many taxpayers, the law will also apply the kiddie tax if the child:

• Is over age 18 (but under age 24) and
• Is a full-time student and
• Has earned income that does not exceed one half of the student’s total support.

Summary

With the business tax changes and the new kiddie tax rules, your tax planning may need a tune-up. Why not contact us today to find out more about how the new tax law may affect your situation.

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