Small Business and Work Opportunity Tax Act of 2007

The 2007 Small Business Tax Act ("SBTA") targets a number of situations, namely, small businesses by providing tax incentives such as extending and enhancing the Code Sec. 179 expensing, extending the Work Opportunity Tax Credit, etc. To make the new bill revenue neutral, revenue raising provisions were inserted, namely expansion of Code Sec. 1(g)'s Kiddie Tax.

Kiddie tax Section 1(g)(2) was amended effective for taxable years beginning after 5/25/07 to provide generally that the kiddie tax will apply to children who are 18 years old or who are full-time students over the age of 18 but younger than 24 with the provision to only apply to children whose earned income does not exceed one-half of the amount of their support. Thus, this change will affect taxpayers beginning in 2008

Tax Pointer

Prior law prescribed that unearned income in excess of $1700 for children under the age of 18 is taxed at their parents' marginal tax rates, if the rates are higher than the child's tax rates. This law now applies as well to children 18-24 if they receive half their support from their parents. Reg. §1.152-1(a)(2)(I) defines support:

"The term "support" includes food, shelter, clothing, medical and dental care, education, and the like. Generally, the amount of an item of support will be the amount of expense incurred by the one furnishing such item. If the item of support furnished an individual is in the form of property or lodging, it will be necessary to measure the amount of such item of support in terms of its fair market value."

Cases under case law defining support incorporate a person's lifestyle, not necessarily "necessities" so that the definition includes parochial high school, college, summer camp, bicycle repairs, vacations, etc.

Tax planning

1. Because the effective date is not retroactive, before 12/31/07 children 18 and those between 18 and 24 who are receiving more than one-half support, should sell appreciated property in their name to take advantage of their lower rates

2. Parents will no longer be able to flip to kids in college gifts of appreciated property; thus students will probably have to take out student loans to be repaid when the kid reaches 24 cashing in the appreciated property at that time. However, it is impossible to predict what the capital gain rate will be at that time. Note, the tax rate for those in the 15% or lower tax brackets fall to zero in 2008 and remain through 2010, but due to the change in the Kiddie tax, this will have no effect on the children covered by the expansion of the law.

3. The Kiddie tax expansion tracks the definition of the "qualifying child" in the Working Families Tax Relief Act of 2004. However, unlike the uniform definition, a child who is permanently and totally disabled is covered by the kiddie tax.

4. Scholarships received by a student at a Code Sec. 170(b)(1)(A)(ii) educational institution are not counted as support.

5. Parents who have a business can hire their children to work for them and pay them reasonable compensation with this compensation being taxed at the child's tax rates and if the child earns enough to be more than one-half of his or her support for the year, then the child will not be subject to kiddie tax on unearned income.

6. Parents of children who are subject to the new kiddie tax rules should consider means to avoid tax such as making the children stockholders in a family business which produces little or no cash dividends, purchase tax exempt bonds, Series EE savings bond deferring the interest reporting.

§ 179

Congress has tweaked again §179 to increase the base dollar limit from its current amount of $112,000 (reflecting indexing for inflation) to $125,000 for taxable years beginning in 2007 through 2010 with indexing for inflation to continue to apply. Additionally, the investment limitation has been raised from $450,000 to $500,000 for tax years beginning in 2007 through 2010 with indexing for inflation to continue to apply. Off-the- shelf computer software continues to be eligible as well as the other provisions of prior law, such as carryforward of unused expense to future years, revocation of the election by filing amended returns [no consent needed from IRS], etc. The balance of this article covers, in full detail, the following topics that are outlined below. The complete article is available for download at National Tax Institute's web site.

FICA Tip Credit - §45B

Work Opportunity Tax Credit

Present Law

Qualified wages

Calculation of the credit

Minimum employment period

Certification and rules for operation

Qualified veterans targeted group

Qualified first-year wages

High-risk youth targeted group

Vocational rehabilitation referral targeted group

Alternative Minimum Tax

Code Sec. 761(f) - Spouses can elect out of partnership reporting

Qualified joint venture

Tax Pointers

S corporate provisions

Code Secs. 1375 and 1362(d) - Gains from sale or exchange of securities not passive investment income

Elimination of all earnings and profits attributable to pre-1983 years for certain corporations.

Code Sec. 1361(b)(3)(C) - Treatment of the sale of interest in a qualified Subchapter S subsidiary.

Code Sec. 1361(g) - Special rule for bank required to change from the reserve method of accounting on becoming S corporation

Code Sec. 1361(f); Code Sec. 1368(f) - Treatment of bank director shares

Code Sec. 6404 - Suspension of certain penalties and interest

Code Sec. 6330 - Levies to collected federal employment tax liabilities excepted from the pre-levy CDP hearing requirement

Code Sec. 6657 - Increase in penalty for bad checks and money orders

Code Secs. 6694(a) and (b); 7701 - Understatement of taxpayer liability by return preparers

Code Sec. Sec. 7701(a)(36)(A) Code Sec. 6694 Tax Pointer

Code Sec. 6676 - Penalty for filing erroneous refund claims Tax Pointer Gulf Opportunity Zone changes

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Download the rest of this report at www.nti-inc.com/newNTI/resources/m-schlesinger1.htm. Michael Schlesinger is a partner with the firm of Schlesinger & Sussman,New York, NY. He is a former Adjunct Professor of Law, Pace University Law School and author of S Corporations: Tax Practice and Analysis & numerous other books and publications. He regularly contributes to National Tax Institute (www.nti-inc.com) - CPE Conferences - He can be reached at (973) 773-8877.