Small Business and Work Opportunity Tax Act of 2007

Triggers Retroactive and Immediate Changes

President Bush signed on May 25, 2007 the Small Business and Work Opportunity Tax Act of 2007.

The new tax law 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 Hurricanes Katrina, Rita and Wilma, as well as an important package of S corporation reforms.

However, unlike some past tax bills, the revenue raisers that mean more taxes for certain taxpayers offset the full cost of the tax breaks. One such provision, an expansion of the kiddie tax to apply to children who are 18 years old or who are full-time students up to age 24, will impact millions of families.

The major provisions in the most recent tax law designed to assist small business include:

Work Opportunity Tax Credit (WOTC) The new law extends the WOTC for 3 1/2 years through August 31, 2011. It also expands the WOTC to allow the credit to employers who hire disabled veterans and individuals in rural counties that have suffered population declines.

Small Business Expensing The new law extends and expands the Code Sec. 179 enhanced expensing provisions through 2010. It provides for an immediate 2007 increase in the expensing limit from $112,000 to $125,000, with the phase-out level increasing from $450,000 to $500,000. The amount is also indexed for inflation for tax years beginning after 2007 and before 2011.

GO Zone Businesses The new law will also extend special 179 expensing for Go Zone businesses (those devastated by Katrina) through 2008.

FICA Tip Credit In a move to help many small businesses offset the costs of dealing with the higher minimum wage required in the new law, a new tax provision allows employers in the food and beverage industry to receive the full tip credit despite the increase in the Federal minimum wage. The tip credit will be based on a minimum wage of $5.15 per hour rather than the new minimum wage, which will reach $7.25 over the next two years. 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 21, 2006.

Family Business Tax Simplification Under the new law, a married couple who operates a joint venture 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.

Each spouse would take into account his or her share of income, gain, loss, and other items as a sole proprietor. They would not have to file a partnership return (Form 1065) and report two Schedule K-1s. Instead, the couple would each report their share of income on Form 1040, Schedule C.

S Corporation Package Several modifications to the S corporation rules will help small businesses keep the tax benefits of being an S Corporation. The legislation's Subchapter S provisions would facilitate the use of S corporations by closing some of the traps that could trigger termination of S corporation status and by reducing the taxes owed by the shareholders of an S corporation.

Raising those subject to the "kiddie tax" The new law raises the age from under-18 to under-19 (under-24 if a full-time student) at which a child's unearned income (currently in excess of $1700) is taxed at the parent's rate.