Daily Record - June 8, 2007
SMALL BUSINESS AND WORK
OPPORTUNITY
TAX ACT OF 2007
By Megan Broomfield, CPA
On May 25, 2007, the President signed the “Small Business and Work Opportunity Tax Act of 2007” (the “Act”) included as part of the Iraq war funding and federal minimum wage increase legislation (H.R. 2206). As with all tax legislation, the Act contains both tax relief and tax revenue provisions. The following summarizes some of the provisions of the Act.
Tax relief provisions include the following:
Expense Allowance for Small Businesses
For taxable years beginning in 2007 through 2010, the maximum cost of tangible personal property (including off-the-shelf computer software) that businesses may elect to deduct in the year the property is placed in service is increased from $100,000 under prior law to $125,000. The maximum deduction is phased out by the amount by which qualifying property placed in service during the tax year exceeds the investment limitation. The investment limitation for property placed in service in tax years beginning in 2007 was formerly $450,000, as indexed for inflation. The new law retroactively raises the investment limitation to $500,000 for the tax years beginning in 2007 through 2010. The $500,000 amount is indexed for inflation in tax years beginning after 2007 and before 2011.
Election to Not Treat Husband and Wife Joint Venture as a Partnership
For taxable years beginning in 2007 and thereafter, a qualified joint venture owned by a husband and wife filing a joint return is not treated as a partnership for Federal tax purposes. A qualified joint venture is a trade or business with respect to which (1) the only owners are a husband and wife, (2) both spouses materially participate, and (3) both spouses elect for the joint venture not to be treated as a partnership. Instead of reporting as a partner of a partnership, the husband and wife are treated as sole proprietors, each reporting on a Schedule C of their joint Federal income tax return.
Favorable S Corporation Changes
For taxable years beginning after the date of enactment (May 25, 2007),
the following changes have been made:
1. Gains from the sale of stock or securities are not treated as passive investment
income with respect to S corporations having accumulated earning and profits
that may be subject to corporate-level tax on excess net passive income and
the possible termination of its S election.
2. Any accumulated earnings and profits of an S corporation that was not an S
corporation for its first taxable year beginning after December 31, 1996 is
reduced by the accumulated earnings and profits (if any) accumulated in an
S corporation taxable year beginning before January 1, 1983.
For taxable years beginning after December 31,2006,
the following changes have been made:
1. Restricted bank director stock of a bank or bank holding company is not treated
as outstanding stock for purposes of Subchapter S. Instead, the corporation
and the director are essentially treated as if such stock were a debt instrument.
(This provision also provides that bank director stock is not treated as a second
class of stock for taxable years beginning after December 31, 1996.)
2. A financial institution that changes from the reserve method of accounting for
bad debts in order to elect to be an S corporation may also elect to take into
account all adjustments required under Section 481 of the Internal Revenue
Code (IRC) as a result of the method change in the last tax year it was a C
corporation instead of in the first year it becomes an S corporation. This
election eliminates income to the S corporation shareholders on account of
the Sec. 481 adjustment as well as the potential imposition of the built-in gains
tax under IRC Section 1374.
3. An S corporation that sells a percentage interest in the stock of qualified
subchapter S subsidiary (QSub) to a purchaser is treated as having sold
that percentage of the assets of the QSub to the purchaser and transferred
the remaining percentage interest of the QSub to a new corporation in a tax-free
exchange under IRC Sec. 351.
4. Interest paid or accrued by an electing small business trust (ESBT) on
indebtedness to acquire stock of an S corporation is deductible in computing
the taxable income of the S corporation portion of an ESBT.
Work
Opportunity
Tax Credit
The Work Opportunity Tax Credit, the elective credit available to employers on generally first-year wages of employees from certain targeted groups, has been extended with respect to qualified individuals who begin work before September 1, 2011. The Act also expands the qualified veterans’ and high-risk youth (renamed “designated community residents”) targeted groups with respect to individuals who begin work after May 25, 2007. For taxable years beginning after December 31, 2006, the Work Opportunity Tax Credit may offset alternative minimum tax (AMT) liability.
Gulf Opportunity Zone Tax Incentives
Under the Act, the present law expensing for qualified Gulf Opportunity (GO) Zone property has been extended; the low-income housing credit rules for newly constructed or substantially rehabilitated housing in the GO Zones have been extended and expanded; and the present rules with respect to qualifying GO Zone tax-exempt bonds have been liberalized.
Tax revenue provisions include the following:
Children’s Unearned Income Taxed at Parents’ Rate (“Kiddie Tax”):
For tax years beginning after May 25, 2007, the age of a child whose net unearned income (for 2007, unearned income in excess of $1,700) is taxed at his or her parents’ rate is increased from under age 18 to under age 19 or under age 24 if the child is a full-time student. This expansion of the kiddie tax does not apply to children whose earned income exceeds one-half of the amount of their support.
Interest and Penalty Suspension
The Act doubles the period before which accrual of interest and certain penalties are suspended, from 18 months to 36 months, after the filing of a tax return if the IRS has not sent the taxpayer a notice specifically stating the liability and the basis for the liability. The 36 month period is effective for IRS notices issued after November 25, 2007.
Megan
Broomfield
, CPA, is a senior manager with Mengel, Metzger, Barr & Co. LLP and may be reached at Mbroomfield@mmb-co.com. 
