On May 25th, the Small Business and Work Opportunity Tax Act of 2007 was signed into law. Congress passed this Act in order to provide small business tax relief as a counter to the phased-in increase in the federal minimum wage from $5.15 an hour to $7.25 an hour over the next two years.
The Act was designed to be revenue neutral which means that the $5 billion in small business tax cuts were offset by $5 billion in tax increases which were mostly targeted at individuals. Significant tax provisions included in the Act are discussed below.
The Act was designed to be revenue
Tax Simplification For Family Businesses
Effective for tax years beginning after December 31, 2006, spouses who file a joint federal income tax return can now elect to treat an unincorporated business owned solely by the couple (with material participation by both) as a sole
proprietorship rather than a partnership for federal income tax purposes. Each electing spouse can report his or her share of income, gains, losses, deductions and credits from a "qualified joint venture" as if attributable to a sole
Section 179 Deduction
For taxable years beginning after 2006 and before 2011, qualifying small businesses may elect to expense, rather than depreciate, the cost of qualified section 179 property up to $125,000 which is a significant increase over past years. The Act also increases the phaseout threshold to $500,000. Both of those amounts will be indexed for inflation.
Subchapter S Corporations
Effective for taxable years beginning in 2007, the sale of stock of a qualified subchapter S subsidiary (QSub) that results in the termination of the QSub election will be treated as a taxable sale of an undivided interest in the assets of the former QSub followed by a transfer to the former QSub of all its assets in a transaction subject to section 351 of the Internal Revenue Code. The taxable sale will be based on the percentage of stock sold.
Capital gains from the sale or exchange of stock or securities will not be treated as passive income that could subject an S corporation with C corporation earnings and profits to the "sting tax" on excess net passive income or potential termination of the S corporation election. This provision is effective for taxable years beginning after May 25, 2007.
Effective for all taxable years beginning in 2007, electing small business trusts can deduct interest expense incurred to acquire S corporation stock.
The Act now provides that "restricted bank director stock" is not treated as outstanding stock for purposes of Subchapter S. For taxable years beginning in 2007, issuing qualified restricted bank director stock will not be taken into accound in determining the number of the S corporation's shareholders, whether the S corporation has a single class of stock or the distributive share of income passed through to shareholders.
A subchapter S bank which changes from the reserve method of accounting for bad debts can now elect to take into account all adjustments under section 481 of the code in the year before the S corporation election is effective (the bank's last C corporation year). This change is effective for taxable years beginning in 2007.
Work Opportunity Tax Credit
Certain employers hiring individuals from targeted groups are eligible for the Work Opportunity Tax Credit (WOTC). The WOTC has been extended through August 31, 2011, and the availability of the WOTC has been expanded. The Act also provides a permanent waiver of the individual and corporate alternative minimum tax limitations for the WOTC.
The Kiddie Tax which taxes the unearned income of certain children at the parents' tax rate has been expanded to apply to unearned income of a child under age 19 (24 if a student) whose unearned income does not exceed one-half of the child's support for the taxable year. This provision takes effect for taxable years beginning after May 25, 2007.
The IRS now has 36 months rather than 18 months in which to notify a taxpayer who timely filed a return of a tax liability before interest and certain penalties will be suspended. The Act also imposes a 20 percent assessable penalty on claims for refunds that are filed without any reasonable basis after May 25, 2007.
The IRS is no longer required to hold a collection due process hearing before serving a levy to collect unpaid employment taxes if the taxpayer previously requested a collection due process hearing with respect to unpaid employment taxes arising within two years prior to the beginning of the taxable period for which the levy is served.