After months of political firestorms,President Bush signed the Small Business and Work Opportunity Tax Act of 2007. On May 24, 2007, both chambers of Congress approved the bill, which was subsequently signed into law by the president on May 25, 2007. The new legislation provides significant tax incentives to small businesses including Gulf Opportunity Zone tax incentives to help taxpayers recovering from Hurricane Katrina, as well as important changes affecting S corporations.
Smart Business spoke to Scott A. Rittenberg, CPA and a tax shareholder at Tauber & Balser, P.C., about the recent tax law changes and how they will affect small businesses.
What are some of the major tax incentives affecting small businesses?
The new law enhances and extends the expensing provisions for Section 179 through 2010. Most new business equipment can be either depreciated over its useful life or expensed immediately under Internal Revenue Service Code Section 179. The Small Business and Work Opportunity Act of 2007 provides for an immediate increase in the expensing limit from $112,000 to $125,000.
The new law will also extend Section 179 expensing to Gulf Opportunity Zone businesses (those affected by Hurricane Katrina and other recent hurricanes) to the year 2011 starting with the $125,000 limit for 2007.
The Work Opportunity Tax Credit (WOTC) has been extended for three years through Sept. 30, 2011. The WOTC, which includes the former Welfare-to-Work Tax Credit, promotes the hiring of individuals who qualify as members of a target group and provides a federal tax credit of up to $9,000 to employers who hire these individuals. The new law also expands the WOTC to allow credit to employers who hire disabled veterans and individuals in counties that have suffered.
In an effort to help many small businesses offset the costs resulting from the higher minimum wage requirements, employers of tipped employees may now receive a full tip credit. The credit is figured using FICA taxes paid on reported tips and wages that exceed the minimum wage requirement. The tip credit will be based on a minimum wage of $5.15 per hour rather than the new minimum wage, which will reach $7.25 over the next two years. The amount of the tax credit will not be reduced even though the minimum wage has increased. This provision applies to tips received for services performed after Dec. 31, 2006.
Have any tax incentives benefited family businesses?
For tax years beginning after Dec. 31, 2006, a married couple who operates a joint venture and who files a joint return can elect not to be treated as a partnership for federal tax purposes. Instead, each spouse can report their share of income on Form 1040, Schedule C, and take his or her share of income, gain, loss and other items as a sole proprietor, eliminating the need to file a federal partnership income tax return.
What types of modifications to S corporation rules have been enacted?
S corporation changes include:
- A new opportunity for electing small business trusts to deduct interest on debt used to acquire S stock;
- Favorable alterations to the treatment of a deemed sale of QSub stock;
- Elimination of passive income treatment from gains on sales of stock and securities; and
- Favorable changes for banks operating as S corporations.
Are there any provisions that will increase taxes and penalties for taxpayers?
There are provisions in the new tax law that will translate into more taxes for certain taxpayers. An expansion of the ‘kiddie tax’ will raise the age from under 18 to under 19 (under 24 if a student) at which a child’s unearned income in excess of $1,700 is taxed at the parent’s rate.
The new law has a number of IRS-related revenue enhancers that will raise an estimated $5 billion over the next 10 years:
- Preparer penalties expanding preparer penalties to all types of tax returns while raising the amounts of the penalties.
- Collection Due Process hearings eliminating the requirement that the IRS hold a collection due process hearing before issuing a levy on delinquent employment taxes.
- Interest Suspension doubling the time that the IRS has before it must stop charging interest and filing related penalties if it fails to notify the taxpayer about a tax deficiency. Currently, notification time is 18 months but will be increased to 36 months.
SCOTT A. RITTENBERG, a tax shareholder at Tauber & Balser, P.C., has more than 15 years of publlic accounting experience dealing with the tax issues of small to medium-sized businesses, with an expertise in family business, tax insolvency issues and closely held businesses. Reach him at (404) 814-4974 or firstname.lastname@example.org.