Earlier this year, President George W. Bush signed The Small Business and Work Opportunity Tax Act of 2007 (SBWOTA), intended in part to benefit small businesses likely to be hit hard by the minimum wage increase.
However, Congress has still not addressed the problem of expiring tax credits and a change to the Alternative Minimum Tax this year that, if not corrected, will increase taxes for about 21 million taxpayers in 2007. SBWOTA is no windfall to be sure, but it is worth discussing with your tax adviser. Some of the provisions could reduce the size of the check you send the IRS.
Following are highlights of SBWOTA’s key provisions affecting businesses and individuals, as well as other areas of tax law.
Businesses
The Section 179 election to expense property in its initial year (rather than depreciate it) is extended through 2010 and increased from $100,000 to $125,000 beginning in tax year 2007. The expense deduction begins to phase out if more than $500,000 of eligible property is placed in service during the year (up from $400,000). These amounts will be adjusted for inflation annually.
The Work Opportunity tax credit, which had been set to expire Dec. 31, is extended until September 30, 2011. This credit is available to businesses that hire employees from targeted groups, such as veterans, ex-felons, high-risk youth, and food stamp and Supplemental Security Income recipients. The new law expands this list to include disabled veterans and individuals in counties that have suffered significant population losses. If you hire a target employee, you can receive a 40-percent tax credit for the first $6,000 paid to that worker.
The individual and corporate alternative minimum tax (AMT) limits on the use of certain credits are waived, effective after tax year 2006 as well as for carryback of these credits. This applies to the Work Opportunity credit and the credit for taxes paid on employee tips. Employers are also now eligible for the full tip credit despite the increase in the minimum wage.
SBWOTA includes certain S corporation and pension provisions, but they are too technical to cover here. See your tax adviser for the details.
Individuals
The new law also affects some individual taxpayers. The “kiddie tax,” which subjects children (and now young adults) to tax on most unearned income at their parents’ marginal tax bracket, had recently been expanded to include those under age 18 (up from age 14). Now, SBWOTA broadens that rule to include those who qualify as dependents because they are either under age 19, or under age 24 and a full-time student, if their earned income doesn’t exceed one half of the amount needed for their support.
Other changes
Finally, the act subjects tax return preparers to increased levels of penalty for the redefined category of unreasonable positions taken on a tax return, as well as for the category of “willful and reckless” tax positions. The legislation also makes changes in the pension area, as well as numerous other minor changes and technical corrections.
In addition, the legislation extends several tax incentives intended to benefit those doing business in the Gulf Opportunity Zone. If you are, see your tax adviser for the details.
Unresolved Issues
In a response to the AMT affecting more and more taxpayers each year, Congress passed legislation that would put a temporary patch on the AMT calculation by increasing the exemption for AMT purposes. But that legislation expired in 2006. As a result, many taxpayers will be paying substantially more in taxes for 2007 on the same income they received last year.
There are also a number of popular tax credits and deductions that are set to expire in 2007, including the R&D credit, deductions for state sales taxes, the educator’s deduction, the qualified tuition deduction, the enhanced charitable deduction for food and books, as well as other more focused credits and deductions.
A bill is currently making its way through Congress to address some of these issues with one-year extenders, but there are some controversial tax increases included to pay for the $80 billion of fixes. These include requiring private investment fund managers to pay taxes on the carried interests of their fund profits at ordinary tax rates rather than capital gains rates, a change in the taxability of deferred compensation in offshore shelters, as well as an increase in the estimated tax requirements of corporations in 2012.
With the partisanship in Washington these days we may find that Congress and the Bush administration cannot agree on this legislation. We are quickly running out of time to make these changes. It takes 10 to 12 weeks to program changes into the tax forms for the year. If agreement cannot be achieved there will be a lot of taxpayers unpleasantly surprised this year with the amount of taxes that they will owe in April of 2008.
This has been a general discussion and is not intended as advice to anyone. Consult your tax adviser to see whether any of the changes outlined above affect your tax-planning strategies. •
Grafton H. “Cap” Willey IV, CPA, is a shareholder in charge of Tofias’ Rhode Island offices. He can be reached at willeycap@tofias.com.
