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
[email protected].