On May 25, President Bush signed the Small Business and Work Opportunity Tax Act (SBWTA) which is intended in part to soothe the burden on small business of the increase in the minimum wage. This new legislation contains an assortment of tax relief and revenue raising provisions that apply to businesses as well as individual taxpayers.
The main tax breaks in the small business tax package include the following:
Extend and liberalize the work opportunity tax credit. The work opportunity tax credit is available on an elective basis for employers hiring individuals from one or more of nine targeted groups. The amount of the credit available to an employer is determined by the amount of qualified wages paid by the employer. Generally, qualified wages consist of wages attributable to service rendered by a member of a targeted group during the one- or two-year period beginning with the day the individual begins work for the employer. The 2007 Act extends the credit for 3.5 years, through September 1, 2011, with liberalized rules for hiring disabled veterans and workers in rural renewal counties.
Enhance the tip credit for certain small businesses. Employers providing food and beverages to customers for consumption were allowed a credit for FICA taxes paid on employees’ combined wages and tips in excess of the federal minimum wage. The federal minimum wage level for purposes of calculating the tip credit is frozen, thereby allowing restaurants to continue claiming the full tip credit despite an increase in the federal minimum wage.
Waive individual and corporate AMT limitations on work opportunity tax credits and tip credits. Prior law limited a small business' ability to claim the work opportunity tax credit and the tip credit by imposing a limitation that such credits could not be used to offset taxes that would be imposed under the Alternative Minimum Tax (AMT). The new law provides a permanent waiver of the individual and corporate AMT limitations for the work opportunity tax credit and the tip credit.
Extend and enhance Section 179 small business expensing. In lieu of depreciation, a business taxpayer with a sufficiently small amount of annual investment may elect to deduct (or “expense”) such costs under Internal Revenue Code Section 179. The 2007 Act increases the expensing limit to $125,000 and the investment-based expensing phase-out is increased to $500,000, effective for tax years beginning after 2006. The enhanced expensing provision is extended for another year, through 2010.
Extend and enhance certain Gulf Opportunity Zone tax incentives. The Section 179 small business expensing rules allowed for GO (Gulf Opportunity) Zone businesses (i.e., $100,000 higher expensing limit and $600,000 higher phase-out point) are extended for one year, through 2008, for small businesses in the hardest hit area of the GO Zone. Also, the low-income housing credit rules for buildings in the GO Zones are extended and expanded, and the bond financing rules for repairs and reconstructions of residences in the GO Zones are modified.
Simplify family business tax. An unincorporated business that is jointly owned and operated by a married couple in a common law state is permitted to elect to file as two sole proprietorships on their joint Form 1040 rather than filing Form 1065 as a partnership. Under prior law, unless the married couple was located in a community property state, both the married couple and the business were subject to penalties unless they filed as a partnership. The new law also ensures that both spouses pay and receive credit for Social Security and Medicare taxes.
Liberalize several S corporation rules. The new law contains several specific provisions beneficial to S corporations, including measures that:
• Redefine “passive investment income” for purposes of S corporation revocation rules. Now gains from the sale or exchange of stock or securities are excluded from passive investment income.
• Exclude restricted bank director stock from treatment as S corporation stock, reducing the risk that such stock would be considered as a prohibited “second class” of stock.
• Set forth a special accounting rule for banks that become S corporations and that change from the reserve method of accounting for bad debts.
• Revise the tax treatment of sales of stock of wholly-owned subsidiaries of S corporations.
• Eliminate pre-1983 earnings and profits arising during an S corporation year, regardless of whether the corporation was an S corporation in its first taxable year beginning after December 31, 1996.
• Permit an Electing Small Business Trust (ESBT) to deduct interest expense it incurs when it borrows funds to purchase S corporation stock.
The Act pays for the above benefits by:
Raising the kiddie tax age from under-18 to under-19 or under-24 if a full-time student. Under the “kiddie tax,” the net unearned income of a child over an annual limit is taxed at the parents’ tax rates if the parents’ tax rates are higher than the tax rates of the child. The remainder of a child’s taxable income (i.e., earned income, plus unearned income up to the annual limit less the child’s standard deduction) is taxed at the child’s rates. For these purposes, unearned income is income other than wages, salaries, professional fees, other amounts received as compensation for personal services actually rendered, and distributions from qualified disability trusts.
For 2006 and 2007 the “kiddie tax” applies to a child if: (1) the child has not reached the age of 18 (age 14 before 2006) by the close of the taxable year and either of the child's parents is alive at such time; (2) the child’s unearned income exceeds an annual limit ($1,700 for 2007); and (3) the child does not file a joint return with a spouse. The kiddie tax applies regardless of whether the child may be claimed as a dependent by either or both parents.
Beginning in 2008, the Act generally expands the “kiddie tax” to apply to children who are 18 years old or who are full-time students over age 18 but under age 24.
Increasing the applicability or rate of interest and penalties and other collection enhancements such as:
• Modifying the rule that IRS must stop charging interest and filing related penalties if it fails to notify the taxpayer about a deficiency within 18 months after the taxpayer filed the return - the time limit is extended to 36 months.
• Eliminating the requirement that IRS hold a collection due process hearing before issuing a levy on delinquent employment taxes.
• Expanding penalties assessed on paid preparers to all types of tax returns (e.g., employment, excise, exempt organizations, estate and gift tax) rather than just income tax returns and increasing the penalty amounts.
• Creating a new penalty on claims for refund that are filed without any reasonable basis.
• Increasing the penalty for bad checks and money orders used to pay U.S. Department of Treasury obligations from a minimum of $15 to $25.
Accelerating the payment of 2012 estimated taxes by certain large corporations. In general, corporations are required to make quarterly estimated tax payments of their income tax liability. The Tax Increase Prevention and Reconciliation Act of 2005 (“TIPRA”) provided that in the case of a corporation with assets of at least $1 billion, the payments due in July, August, and September 2012 are increased to 106.25 percent of the payment otherwise due and the next required payment is reduced accordingly. The 2007 Act increases the corporate estimated tax payments due in July, August, and September 2012, from 106.25 percent to 114.25 percent of the payment otherwise due. As under present law, the next payment is reduced accordingly.
For more information about the tax act, contact your local Yeo & Yeo tax professional.
