The 2007 Small Business Tax Act
targets nearly $5 billion in tax incentives principally to small businesses
but also to some larger ones. It also
includes tax incentives to help taxpayers recovering from Hurricane Katrina,
as well as an important package of S corporation reforms.
Revenue raising provisions totaling nearly $5
billion mean more taxes for certain taxpayers (and penalties for tax
practitioners in some cases). One of them
-- an expansion of the kiddie tax to apply to children who are under age 19
or who are full-time students up to age 24 -- will impact millions of
families.
SMALL BUSINESS TAX INCENTIVES
The small business tax incentives are
designed to help businesses absorb the cost of a higher federal minimum
wage. The new law gradually raises the minimum wage to $7.25 over two years.
Highlights of the small business tax incentives are:
-
an extended and enhanced small
business Code Sec. 179 expensing;
-
a FICA tip credit calculation that ignores
the new hike in the minimum
wage; and
-
an extended and enhanced Work Opportunity
Tax Credit.
Small Business Expensing
Almost every new tax law over the past few years has tweaked small business
expensing under Code Sec. 179 and the 2007 Small Business Tax Act is
no
exception. The dollar and investment limitations are increased.
Dollar limitation. Under the
new law, the base $100,000 limit ($112,000 as indexed for inflation for
2007) is increased
to $125,000 for tax years beginning in 2007 through 2010.
FICA Tip Credit
Under the 2007 Small Business Tax Act, the FICA tip credit (also known as
the Sec. 45B credit) will continue to be based on the old minimum wage
of $5.15 per hour, rather than the new minimum wage, which will reach $7.25
over the next two years. As a result, even though the minimum wage has
increased, the amount of the tip credit will not be reduced. The provision
applies with respect to tips received for services performed after December
31, 2006.
An employer may claim a credit for FICA tax
paid on tips received by employees for serving or delivering food or
beverages consumed on the employer’s
premises if tipping is customary. Employers may claim the Code Sec. 45B
credit even if employees do not report the tips. The credit equals the
employer’s
FICA obligation (7.65 percent) attributable to tips that exceed those tips
treated as wages for purposes of the minimum wage requirements of the Fair
Labor
Standards Act (FLSA).
Work Opportunity Tax Credit
The 2007 Small Business Tax Act extends the
Work Opportunity Tax Credit (WOTC) through August 31, 2011. It had been set
to expire for employees hired after December 31, 2007. The new law also
broadens the scope of the credit. The expanded WOTC is effective starting
May 26, 2007.
The WOTC encourages employers to hire
individuals from various economically challenged populations. Traditionally
the credit, which is a percentage of qualified wages paid during each of the first two years of employment,
targeted individuals receiving public assistance, high-risk youth,
ex-felons, veterans, and others similarly situated.
The 2007 Small Business
Tax Act expands the targeted veterans’ community. It now includes veterans
with service-connected disabilities who have been unemployed for six months
or more during a one year period ending on the hire date (the six months
does not have to be consecutive) and are hired within one year after having
been discharged from the military or released from active duty.
Additionally, the new law raises the qualified wage threshold for the
expanded veterans’ groups (from $6,000 to $12,000).
The high-risk youth and
vocational rehabilitation referral targeted
groups have also been expanded.
FAMILY BUSINESS TAX SIMPLIFICATION
Under the 2007 Small Business Tax Act, a married couple who jointly
operates an unincorporated business and who files a joint return can elect
not to be treated as a partnership for federal tax purposes. This
treatment is available for tax years beginning after December 31, 2006.
The husband and wife can be the only members
of the joint venture. If there are other individuals in the enterprise, the
provision does not apply. Additionally,
both spouses must materially participate in the business.
S CORPORATIONS
The 2007 Small Business Tax Act includes a package of S corp reforms.
The changes impact the treatment of passive investment income, partial sale
of qualified subchapter S subsidiaries (QSubs), reduction of earnings and
profits (E&P).
Passive Investment Income
The passive investment income test has long been a trap for S corps that
convert from C corp status. The 2007 Small Business Tax Act
eliminates some of that worry and does an about-face by no longer treating
capital gain from the sale or exchange of stock or securities as an item of
passive
investment income.
Partial Sale of QSubs
A qualified subchapter S corporation is a wholly-owned subsidiary that an
S corp elects to treat as a “QSub.” Once the QSub is no longer wholly-owned
by the S corp, it ceases to be a QSub and is treated as a new corporation
that acquired all its assets from the parent S corp in exchange for stock.
The Treasury regulations apply general tax law principles to determine the
tax consequences of the change in status.
Under the 2007 Small Business Tax Act,
a sale of QSub stock that terminates the QSub election and creates a deemed
new corporation will be treated as a sale of an undivided interest in the
assets of the QSub. The new treatment takes effect for tax years beginning
on or after December 31, 2006.
Reduction of E&P
The new law allows an S corp to reduce its accumulated earnings and profits
(E&P) by its pre-1983 accumulated E&P for which the corporation was an S
corp. This benefit involving pre-1983 E&P had previously been available only
to a corporation that was an S corp for its first taxable year after 1996.
This provision takes effect for tax years beginning after May 25, 2007.
REVENUE RAISERS
Not all provisions in the 2007 Small
Business Tax Act are pro-taxpayer. Some of the revenue raisers will hit
a lot of taxpayers’ wallets. The measures are expected to raise almost $5
billion over 10 years, making the new law fully offset.
Major “Kiddie Tax” Changes
The 2007 Small Business Tax Act
extends the reach of the “kiddie tax” by raising the age limit to include
(1) all children under age 19 (previously under age 18) and (2) students
under age 24. Both changes are effective for tax years beginning after May
25, 2007.
The actual computation of the kiddie tax
remains the same. The net unearned income of the child (for 2007, generally
unearned income over $1,700) is taxed at the parents’ marginal tax rates, if
the rates are higher than the child’s tax rates. Only last year, TIPRA
raised the reach of the kiddie tax from under age 14 to under age 18. |
