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2007 Small Business Tax Act
On May 25, the president signed into law the 2007 Small Business Tax Act. This new
legislation was designed to reduce the burden on small businesses due to the
increase in the federal minimum wage to $7.25 over the next two years. It appears
that the tax relief should be recognized by a portion of the group the bill was
designed for. The increase in immediate expensing of capital investment, along with
the enhancement and extension of employer credits should provide real dollars to some
small businesses. Here is the assortment of tax relief and revenue raising provisions.
Tax Relief
- Extend and Enhance Section 179 Small Business Expensing.
The (Code Sec. 179 ) expensing limit is increased to $125,000 and the annual
investment phase-out is increased to $500,000 (both indexed for inflation),
effective for tax years beginning after 2006, and the enhanced expensing provision
is extended through 2010.
- Enhance the FICA Tip Credit for Small Businesses.
The Federal minimum wage level for purposes of calculating the tip credit
is frozen, thereby allowing taxpayers to continue claiming the full tip
credit despite an increase in the Federal minimum wage.
- Extend and Liberalize the Work Opportunity Tax Credit (WOTC).
The credit is extended for 44 months with expansion and enhancement
of certain targeted employment groups.
- Eliminate AMT Limitations on WOTC and FICA Tip credit.
The new law eliminates the individual and corporate AMT limitations
for the work opportunity tax credit and the tip credit.
- Simplify Family Business Tax.
An unincorporated business that is jointly owned by a married couple and
currently organized as a partnership is now permitted to file as a sole
proprietorship thereby eliminating the need for filing of Form 1065
and related K-1’s.
- Liberalize S Corporation Rules.
The new law also contains provisions beneficial to S corporations,
including exclusion of gains from the sale or exchange of stock or
securities as an item of passive investment income. There are also
provisions that have limited usefulness in specific circumstances (i.e banks,
ESBT's and Q-Subs).
- Extend and Enhance GO Zone Tax Incentives.
The act includes a number of GO Zone related tax relief provisions. The
term "GO Zone" refers to the areas along the Gulf Coast that were hardest
hit by the 2005 hurricanes Katrina, Rita, and Wilma and that have been
designated for tax and other forms of relief legislation designed to
spur re-investment and redevelopment.
Revenue Raisers
- Expand "Kiddie Tax".
The new law modifies the so-called "Kiddie Tax". Previously, unearned income of
children under the age of 18 that exceeds an inflation-adjusted amount
($1,700 for 2007) is taxed to the children at the rates that would apply if
that income were included in the parent's return. These rules may now apply
to children up to age 24 if the child is a full-time student and the child's
earned income for the tax year does not exceed one half of his or her support.
- Create New Taxpayer Penalty.
The act creates a new 20% penalty on the "excessive amount" of a disallowed
refund claim based upon a position that has no "reasonable basis".
- Extend Accrual of Interest and Penalties on Tax Returns.
The new law also contains provisions beneficial to S corporations,
including exclusion of gains from the sale or exchange of stock or
securities as an item of passive investment income. There are also
provisions that have limited usefulness in specific circumstances (i.e banks,
ESBT's and Q-Subs).
- Extend IRS User Fees
The act makes permanent the IRS’s ability to charge user fees.
Please note that these are only the highlights of the most important changes in the new law.
Please contact us for more details on how you may be affected by this important tax legislation.
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