Small Business Taxes & ManagementTM--Copyright 2007, A/N Group, Inc.
Work Opportunity Tax Credit
In General. The new law extends the work opportunity tax credit for 44 months (for qualified individuals who begin work for an employer after December 31, 2007, and before September 1, 2011). The provision expands the qualified veterans' targeted group to include an individual who is certified as entitled to compensation for a service-connected disability and: (1) having a hiring date which is not more than one year after having been discharged or released from active duty in the Armed Forces of the United States, or (2) having been unemployed for six months or more (whether or not consecutive) during the one-year period ending on the date of hiring. Being entitled to compensation for a service-connected disability is defined with reference to section 101 of Title 38, U.S.C., which means having a disability rating of 10-percent or higher for service connected injuries.
Qualified First-Year Wages. The provision expands the definition of qualified first-year wages from $6,000 to $12,000 in the case of individuals who qualify under either of the new expansions of the qualified veteran group, above. The expanded definition of qualified first-year wages does not apply to the veterans qualified with reference to a food stamp program, as defined under present law.
High-Risk Youth Targeted Group. The provision expands the definition of high-risk youths to include otherwise qualifying individuals age 18 but not yet age 40 on the hiring date. Also, the provision expands the definition of eligible individuals under this category to include otherwise qualifying individuals from rural renewal counties. For these purposes, a rural renewal county is a county outside a metropolitan statistical area (as defined the Office of Management and Budget) which had a net population loss during the five-year periods 1990-1994 and 1995-1999. Finally, the provision changes the name of the category to the "designated community residents" targeted group.
Vocational Rehabilitation Referral Targeted Group. The provision expands the definition of vocational rehabilitation referral to include any individual who is certified by a designated local agency as an individual who has a physical or mental disability that constitutes a substantial handicap to employment and who has been referred to the employer while receiving, or after completing, an individual work plan developed and implemented by an employment network pursuant to subsection (g) of section 1148 of the Social Security Act.
The provisions are effective for individuals who begin work for an employer after May 25, 2007.
Increase and Extension of Expensing for Small Business
Instead of depreciation tangible personal property Section 179 allows taxpayers to elect to write off up to $100,000 (adjusted for inflation) of qualifying property placed in service during the year, subject to certain restrictions. The $100,000 amount is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the taxable year exceeds $400,000. The $100,000 amount was scheduled to drop to $25,000 in 2010.
The new law increases the $100,000 and $400,000 amounts to $125,000 and $500,000, respectively, for taxable years beginning in 2007 through 2010. These amounts are indexed for inflation in taxable years beginning after 2007 and before 2011. In addition, the provision extends for one year the increased amount that a taxpayer may deduct and the other Section 179 rules applicable in taxable years beginning before 2010. For example, the provision that qualifies computer software for Section 179 treatment. Thus, under the provision, these rules continue in effect for taxable years beginning after 2009 and before 2011.
Tip Credit for Food Service Employers
Employee tip income is treated as employer-provided wages for purposes of the Federal Insurance Contributions Act ("FICA"). Employees are required to report the amount of tips received. A business tax credit is provided equal to an employer's FICA taxes paid on tips in excess of those treated as wages for purposes of meeting the minimum wage requirements of the FLSA. The credit applies only with respect to FICA taxes paid on tips received from customers in connection with the providing, delivering, or serving of food or beverages for consumption if the tipping of employees delivering or serving food or beverages by customers is customary. The new law provides that the amount of the tip credit is based on the amount of tips in excess of those treated as wages for purposes of the FLSA as in effect on January 1, 2007. That is, under the provision, the tip credit is determined based on a minimum wage of $5.15 per hour. Therefore, if the amount of the minimum wage increases, the amount of the FICA tip credit will not be reduced.
provides that the amount of the tip credit is based on the amount of tips in excess of those treated as wages for purposes of the FLSA as in effect on January 1, 2007. That is, under the provision, the tip credit is determined based on a minimum wage of $5.15 per hour. Therefore, if the amount of the minimum wage increases, the amount of the FICA tip credit will not be reduced.
Individual and Corporate Alternative Minimum Tax Limits on Work Opportunity Credit and Tip Credit
Under prior law, business tax credits generally may not exceed the excess of the taxpayer's income tax liability over the tentative minimum tax (or, if greater, 25 percent of the regular tax liability in excess of $25,000). The new law treats the tentative minimum tax as being zero for purposes of determining the tax liability limitation with respect to the work opportunity credit and the credit for taxes paid with respect to employee cash tips. Thus, the work opportunity tax credit and the credit for taxes paid with respect to cash tips may offset the alternative minimum tax liability. The provision applies to credits determined in taxable years beginning after December 31, 2006.
Family Business Tax Simplification
Under prior law, a husband and wife who both work in the same unicorporated business cannot file as a sole proprietorship. Instead, they must file a partnership return.
The provision generally permits a qualified joint venture whose only members are a husband and wife filing a joint return not to be treated as a partnership for Federal tax purposes. A qualified joint venture is a joint venture involving the conduct of a trade or business, if (1) the only members of the joint venture are a husband and wife, (2) both spouses materially participate in the trade or business, and (3) both spouses elect to have the provision apply. Under the provision, a qualified joint venture conducted by a husband and wife who file a joint return is not treated as a partnership for Federal tax purposes. All items of income, gain, loss, deduction and credit are divided between the spouses in accordance with their respective interests in the venture. Each spouse takes into account his or her respective share of these items as a sole proprietor. Thus, it is anticipated that each spouse would account for his or her respective share on the appropriate form, such as Schedule C. The provision is not intended to change the determination under present law of whether an entity is a partnership for Federal tax purposes (without regard to the election provided by the provision). For purposes of determining net earnings from self-employment, each spouse's share of income or loss from a qualified joint venture is taken into account just as it is for Federal income tax purposes under the provision. The provision is effective for taxable years beginning after December 31, 2006.
Extension of Increased Expensing for Qualified Section 179 Gulf Opportunity Zone Property
Instead of a $100,000 Section 179 limitation up to $200,000 of qualifying property placed in service in the Gulf Opportunity Zone (GO Zone) may be expensed under Section 1400N (there are other modifications). The new law extends the increased expensing amount for property substantially all of the use of which is in one or more specified portions of the GO Zone to property placed in service by the taxpayer on or before December 31, 2008. The specified portions of the GO Zone include the Louisiana parishes of Calcasieu, Cameron, Orleans, Plaquemines, St. Bernard, St. Tammany, and Washington, and the Mississippi counties of Hancock, Harrison, Jackson, Pearl River, and Stone.
Extension and Expansion of Low-Income Housing Credit Rules for Buildings in GO Zones
The new law makes several changes to the rules. The provision makes two modifications to the carryover allocation rule for otherwise qualifying buildings located in the GO Zones placed in service before January 1, 2011 by repealing 10-percent rule and the second-year placed in service rule. The provision extends the placed in service dates for buildings eligible for the enhanced credit available under the Gulf Opportunity Zone Act of 2005 for two additional years (2009 and 2010) for allocations made in 2006, 2007, or 2008. The provision modifies the definition of below market Federal loan for otherwise qualifying buildings located in the GO Zones that are placed in service during the period beginning on January 1, 2006 and ending on December 31, 2010. The provisions are effective upon enactment.
Capital Gain not Treated as Passive Investment Income
An S corporation is subject to corporate-level tax, at the highest corporate tax rate, on its excess net passive income if the corporation has (1) accumulated earnings and profits at the close of the taxable year and (2) gross receipts more than 25 percent of which are passive investment income. Passive investment income generally means gross receipts derived from royalties, rents, dividends, interest, annuities, and sales or exchanges of stock or securities (to the extent of gains). In addition, an S corporation election is terminated whenever the S corporation has accumulated earnings and profits at the close of each of three consecutive taxable years and has gross receipts for each of those years more than 25 percent of which are passive investment income.
The new law eliminates gains from sales or exchanges of stock or securities as an item of passive investment income, effective for taxable years beginning after May 25, 2007.
Treatment of Sale of an Interest in a Qualified Subchapter S Subsidiary
Under present law, an S corporation that owns all the stock of a corporation may elect to treat the subsidiary corporation as a qualified subchapter S subsidiary ("QSub"). A qualified subchapter S subsidiary is disregarded as a separate entity for Federal tax purposes and its items of income, deduction, loss, and credit are treated as items of the S corporation.
The new law provides that where the sale of stock of a QSub results in the termination of the QSub election, the sale is treated as a sale of an undivided interest in the assets of the QSub (based on the percentage of the stock sold) followed by a deemed transfer to the QSub in a transaction to which section 351 applies. Thus, in the example in the regulations, the S corporation will be treated as selling a 21 percent-interest in all the assets of the QSub to the unrelated party, followed by a transfer of all the assets to a new corporation in a transaction to which section 351 applies. Thus, the S corporation will recognize 21 percent of the gain or loss in the assets of the QSub. The provision is effective for taxable years beginning after December 31, 2006.
Elimination of Earnings and Profits Attributable to Pre-1983 Years
The Small Business Jobs Protection Act of 1996 provided that if a corporation was an S corporation for its first taxable year beginning after December 31, 1996, the accumulated earnings and profits of the corporation as of the beginning of that year were reduced by the accumulated earnings and profits (if any) accumulated in a taxable year beginning before January 1, 1983, for which the corporation was an electing small business corporation under subchapter S.
The new law provides in the case of any corporation which was not an S corporation for its first taxable year beginning after December 31, 1996, the accumulated earnings and profits of the corporation as of the beginning of the first taxable year beginning after the date of the enactment of this provision is reduced by the accumulated earnings and profits (if any) accumulated in a taxable year beginning before January 1, 1983, for which the corporation was an electing small business corporation under subchapter S. The provision applies to taxable years beginning after May 25, 2007.
Deductibility of Interest Expense of an ESBT on Indebtedness Incurred to Acquire S Corporation Stock
Under present law, an electing small business trust (“ESBT”) is subject to a tax at the highest individual income tax rate (currently 35 percent) on the portion of the trust which consists of stock in one or more S corporations (“S portion”). The income from the S portion of an ESBT is not included in the beneficiaries' income. The new law provides that, effective for taxable years beginning after December 31, 2006, a deduction for interest paid or accrued on indebtedness to acquire stock in an S corporation may be taken into account in computing the taxable income of the S portion of an ESBT.
Generally, the kiddie tax applies to a child if: (1) the child has not reached the age of 18 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 $1,700 (for 2007); and (3) the child does not file a joint return. The kiddie tax applies regardless of whether the child may be claimed as a dependent by either or both parents. Under these rules, the net unearned income of a child (for 2007, generally unearned income over $1,700) is taxed at the parents' tax rates if the parents' tax rates are higher than the tax rates of the child. Basically, a hypothetical tax rate is arrived at by adding the child's income to the parents, then applying that rate to the child's income.
The provision 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. The expanded provision applies only to children whose earned income does not exceed one-half of the amount of their support.
The new rules provide some added complications to the kiddie tax. Whether or not the kiddie tax will apply can depend on several factors. In effect, there are now three age groups to consider.
From a practical standpoint, very few children who are still in school will be providing over half their support from their earned income. Support includes the fair rental value of lodging, clothing, education, medical care, transportation, entertainment, etc. Thus, more than likely, your child will be subject to the kiddie tax until he or she reaches age 24 or finishes school.
Planning Point--The new rules don't take effect until January 1, 2008. If your child will be over 17 by the end of the year and is holding appreciated property, it might make sense to sell now. As always, investment considerations should be paramount. If the gain is long-term, the difference between your tax rate (15%) and your child's rate (probably 5%) is only 10%. That may or may not be a significant saving depending on the amount of the gain. Talk to your investment advisor before selling.
In general, interest and penalties accrue during periods for which taxes were unpaid without regard to whether the taxpayer was aware that there was tax due. The Code suspends the accrual of certain penalties and interest starting 18 months after the filing of the tax return if the IRS has not sent the taxpayer a notice specifically stating the taxpayer's liability and the basis for the liability within the specified period. If the return is filed before the due date, for this purpose it is considered to have been filed on the due date. Interest and penalties resume 21 days after the IRS sends the required notice to the taxpayer. The provision is applied separately with respect to each item or adjustment. The provision does not apply where a taxpayer has self-assessed the tax. The suspension applies only to taxpayers who are individuals and who file a timely tax return. In addition, the provision does not apply to the failure-to-pay penalty, in the case of fraud, or with respect to criminal penalties. Generally, the provision also does not apply to interest accruing with respect to underpayments resulting from listed transactions or undisclosed reportable transactions.
The new law extends the period before which accrual of interest and certain penalties are suspended. Under the provision, the accrual of certain penalties and interest is suspended starting 36 months after the filing of the tax return if the IRS has not sent the taxpayer a notice specifically stating the taxpayer's liability and the basis for the liability. The provision is effective for IRS notices issued after the date that is six months after May 25, 2007.
Levy is the IRS's administrative authority to seize a taxpayer's property to pay the taxpayer's tax liability. The IRS is entitled to seize a taxpayer's property by levy if a Federal tax lien has attached to such property. A Federal tax lien arises automatically when (1) a tax assessment has been made, (2) the taxpayer has been given notice of the assessment stating the amount and demanding payment, and (3) the taxpayer has failed to pay the amount assessed within 10 days after the notice and demand. In general, the IRS is required to notify taxpayers that they have a right to a fair and impartial collection due process ("CDP") hearing before levy may be made on any property or right to property.
Under the new law, a levy issued to collect Federal employment taxes is excepted from the pre-levy CDP hearing requirement if the taxpayer subject to the levy requested a CDP hearing with respect to unpaid employment taxes arising in the two-year period before the beginning of the taxable period with respect to which the employment tax levy is served. However, the taxpayer is provided an opportunity for a hearing within a reasonable period of time after the levy. As the Code provides for State tax refunds or jeopardy determinations, collection by levy of employment tax liabilities is permitted to continue during the CDP proceedings. The provision is effective for levies issued on or after 120 days after May 25, 2007.
The IRS generally charges a fee for requests for a letter ruling, determination letter, opinion letter, or other similar ruling or determination. These user fees are authorized by statute through September 30, 2014. The new law permanently extends the statutory authorization for IRS user fees.
The law imposes a penalty on a person who tenders a bad check or money orders. The penalty is two percent of the amount of the bad check or money order. Under prior law checks or money orders that are less than $750, are subject to minimum penalty is $15 (or, if less, the amount of the check or money order). The new law increases the minimum penalty to $25 (or, if less, the amount of the check or money order), applicable to checks or money orders that are less than $1,250. The provision is effective for checks or money orders received after May 25, 2007.
An income tax return preparer who prepares a return with respect to which there is an understatement of tax that is due to an undisclosed position for which there was not a realistic possibility of being sustained on its merits, or a frivolous position, is liable for a first-tier penalty of $250, provided the preparer knew or reasonably should have known of the position. For willful or reckless conduct, a return preparer is liable for a second-tier penalty of $1,000.
The new law broadens the scope of the present-law tax return preparer penalties to include preparers of estate and gift tax, employment tax, and excise tax returns, and returns of exempt organizations.
The new law also alters the standards of conduct that must be met to avoid imposition of the penalties for preparing a return with respect to which there is an understatement of tax. First, the provision replaces the realistic possibility standard for undisclosed positions with a requirement that there be a reasonable belief that the tax treatment of the position was more likely than not the proper treatment. The provision replaces the not-frivolous standard accompanied by disclosure with the requirement that there be a reasonable basis for the tax treatment of the position accompanied by disclosure.
The provision also increases the first-tier penalty from $250 to the greater of $1,000 or 50 percent of the income derived (or to be derived) by the tax return preparer from the preparation of a return or claim with respect to which the penalty is imposed. The provision increases the second-tier penalty from $1,000 to the greater of $5,000 or 50 percent of the income derived (or to be derived) by the tax return preparer.
The provision is effective for tax returns prepared after May 25, 2007.
The provision imposes a penalty on any taxpayer filing an erroneous claim for refund or credit. The penalty is equal to 20 percent of the disallowed portion of the claim for refund or credit for which there is no reasonable basis for the claimed tax treatment. The penalty does not apply to any portion of the disallowed portion of the claim for refund or credit relating to the earned income credit or any portion of the disallowed portion of the claim for refund or credit that is subject to accuracy-related or fraud penalties. The provision is effective for claims for refund or credit filed after May 25, 2007.
The new law contains a number of pension related provisions. Most of these are of interest only to plan specialists. We will just list the titles here (section numbers refer to Internal Revenue Code sections:
Revocation of Election Relating to Treatment as Multiemployer Plan (Sec. 414(f))
Modification of Requirements for Qualified Transfers (Sec. 420)
Extension of Alternative Deficit Reduction Contribution Rules (Sec. 402(i))
Modification of the Interest Rate for Pension Funding Rules (Sec. 402(a))
Copyright 2007 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject.--ISSN 1089-1536
--Last Update 06/18/07