"Small Business and Work Opportunity Tax Act of 2007"
Last month President Bush signed into law H.R. 2206, which includes the following tax provisions under the lengthy subtitle "Small Business and Work Opportunity Tax Act of 2007":

Congress passes small business tax cuts

Nearly $5 billion in small business tax cuts are now law. Just before Memorial Day weekend, Congress passed and President Bush signed the Small Business Work Opportunity Tax Act of 2007 (H.R. 2206). While the federal minimum wage will rise to $7.25 over two years, some valuable tax breaks will help employers absorb the higher minimum wage. The new law also includes $5 billion in revenue raisers to pay for the tax cuts.

Small business tax breaks

One of the first priorities of the new Democratic-controlled Congress was to raise the minimum wage. The House passed a minimum wage bill in January. The Senate, however, wanted to add some tax incentives to help small businesses pay for the higher minimum wage. The two chambers passed different bills but ultimately decided on this package of tax breaks.

That was the easy part. The tax breaks would have been enacted sooner but they were attached to the controversial Iraq war spending bill. President Bush vetoed the first war spending bill in early May because it included a timetable for withdrawing troops from Iraq. Democrats later dropped that language. A final war spending bill, with these tax cuts, passed Congress on May 24 and was signed by President Bush on May 25.

Minimum wage

The minimum wage increase is not immediate. Rather, it increases gradually over the next two years.  It jumps to $5.85 per hour beginning July 24, 2007. It rises to $6.55 starting a year later and $7.25 beginning two years later.

Highlights

All businesses - not just small businesses - can take advantage of the new tax breaks.

Here are some highlights:

Small business expensing: In good news for small businesses, the dollar limitation expensing under Code Sec. 179 is increased immediately to $125,000. The investment limitation also jumps to $500,000. The higher amounts are indexed for inflation and are available through 2010. Taxpayers rebuilding after Hurricane Katrina may be eligible for enhanced Code Sec. 179 expensing in their area. If you're planning some business purchases, we can help you maximize your tax savings under Code Sec. 179.

WOTC: One way Congress is helping businesses absorb the costs of a higher minimum wage is to expand the Work Opportunity Tax Credit (WOTC). This credit rewards employers for hiring economically-challenged individuals. The credit is expanded to cover disabled veterans as well as more high-risk young people and individuals who need vocational rehabilitation and is extended 3 1/2 years. If you aren't familiar with the WOTC, give our office a call. It could be a valuable tax break for your business.

FICA tip credit: Under the new law, the employer's FICA tip credit will not be reduced because of the increase in the federal minimum wage.  Employers can base the tip credit on a minimum wage of $5.15 per hour despite the increase to $7.25 over the next two years.

Joint ventures: Married couples who operate a joint venture and who file a joint return can now elect not to be treated as a partnership for federal tax purposes. This change is intended to make sure that both spouses get credit for paying Social Security and Medicare taxes.

More tax breaks

S corporations are a very popular way of doing business. Some provisions in the new law make them even more attractive. The new law modifies the passive investment income rules and other restrictions to help small businesses keep the tax advantages of S corporation status. Other provisions in the new law affect banks that operate as S corporations.

Some tax breaks in the new law are targeted to Hurricane Katrina victims. Besides the special expensing treatment for Hurricane Katrina victims, the new law also extends the time allowed for building low-income housing through 2010.

Offsets

All of the tax breaks are "offset." This means that other sources of revenue pay for them. In this case, Congress needed to find $5 billion in offsets to pay for the $5 billion in tax cuts.

The biggest offset is a change in so-called the kiddie tax rules. When a child under the age of 18 has unearned investment income in excess of a certain amount and does not file a joint return, the kiddie tax may tax part of that income at the parent's tax rate instead of the child's tax rate. Congress raised the age threshold from under 14 to under 18 last year. The new law raises it to under 19 (under 24 if a student). This change is effective for most taxpayers in 2008.

This change is very significant and could impact many college savings plans. Fortunately, the change is not effective for most taxpayers until next year. There's still time to adjust your tax strategy.

Another major offset impacts employers. The new law limits an employer's right to a collection due process (CDP) hearing before the IRS levies to collect unpaid employment taxes. Congress tightened the CDP eligibility rules because of fears of abuses.

Other revenue raisers include:

• Higher IRS bad check fees;
• Expanded return preparer penalties; and
• A new erroneous refund penalty.

Congress also modified the rule that the IRS must stop charging interest and filing related penalties if it fails to notify a taxpayer about a deficiency within 18 months after the taxpayer filed a return. The new law doubles the timeframe to 36 months.

Although the new law is fully offset, the tax breaks over the first five years are greater than the offsets. The tax cuts and offsets balance one another over 10 years.

Planning opportunities

Every new tax law presents planning opportunities and the Small Business Work Opportunity and Tax Act of 2007 is no different. Don't miss out on some potentially very valuable tax savings. If you have any questions, give our office a call today and we can discuss in detail the important tax breaks in this new law.