CLIENT ALERT

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Lorna E. Smith
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lsmith@untracht.com

July 2, 2007

Small Business and Work Opportunity Tax Act of 2007

Here are some highlights of the Small Business and Work Opportunity Tax Act of 2007 above act signed May, 2007:

Small Business Expensing.
The new law extends and expands the Section 179 enhanced expensing provisions through 2010. It provides for an immediate 2007 increase in the expensing limit from $112,000 to $125,000, with phase-out level from $450,000 to $500,000.

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, couples would each report their share of income on Form 1040, Schedule C.

Before 'simplifying', think about the tax ramifications this may have. For example, on a NJ return, Sch C and Sch K-1 fall into different buckets and can only offset other Sch C's and Sch K-1's, respectively. So if a married couple has a loss from an outside K-1 and income from their own partnership and they elect out of this provision, the outside loss could not be used to offset their partnership income.

S Corp Package.
Several modifications to the S corporation rules that 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 corps by closing some of the traps that could trigger termination of S corp status and by reducing the taxes owed by the shareholders of an S corp:

• The passive investment income test has been a trap for S corps. The new law eliminates some of that worry by switching treatment and no longer characterizing capital gain from the sale of stock or securities as passive investment income.
• The new law favorably alters the treatment of a deemed sale of a qualified subchapter S subsidiary (QSub). A sale of QSub stock that terminates the QSub election would be treated as a sale of an undivided interest in the assets of the QSub
• An S corp will be allowed to reduce its accumulated earnings and profits by its pre-1983 accumulated E&P for which the corporation was an S corp. This benefit of reducing E&P for pre-1983 E&P had previously been available only to a corporation that was an S corp for its first taxable year after 1996.
• The new law allows an electing small business trust to deduct interest paid on money borrowed to acquire S corp stock. Current Treasury regs allocate the interest to the S portion of the ESBT but do not allow a deduction, even though Treasury has the authority to treat the interests as a deductible administrative expense.

Raising those subject to the "kiddie tax."
The new law raises the age from under 18 to under 19 (under 24 if a student) at which a child's unearned income in excess of $1700 is taxed at the parent's rate. If the earned income of a student over age 17 exceeds half of the student’s support, the kiddie tax no longer applies.

Interest suspension.
The new law doubles the time (from 18 months to 36 months) that the IRS has before it must stop accruing interest and certain penalties if it fails to notify the taxpayer about a tax deficiency.

Bad checks.
The fee for bad checks is increased to the greater of $25 or 2% of the check amount.

Preparer penalties.
The new law expands preparer penalties to all types of tax returns (e.g., employment, excise, exempt organizations, estate and gift tax) and increases the standards that must be met to escape penalties for preparing a return with an understatement of tax. It also raises the amounts of the penalties: for an “unreasonable position” increased from $250 to the greater of $1,000 or half the preparer fee and for “willful or reckless conduct” increased from $1,000 to the greater of $5,000 or half the preparer fee.