May 25, President Bush signed a wide-ranging law that
increases the federal minimum wage and gives businesses some
important tax breaks to help offset the cost. The minimum wage
hike and tax provisions were attached to legislation funding
the war in Iraq.
While parts of the new law will
benefit businesses, other parts will hurt families who are
saving money in the
names of their children because of a critical change in the
"Kiddie Tax" rules. College students are potentially exposed
to the tax until the year they turn 24. This is one of
the ways that the new law funds the tax breaks for
Minimum Wage Goes
Under the new law, the hourly minimum wage will increase
from $5.15 to $7.25 over the next two years according to
The first increase to $5.85 will go into effect on July
24, 2007 (60 days after the bill was signed into
the minimum wage will rise to $6.55 one year
final increase will occur two years later in July of
2009, when the minimum wage will rise to
Congress last raised the minimum
wage in 1997.
Keep in mind that federal and
state laws require employers to display posters with
current minimum wage information.
In a series of articles, we will detail the
highlights of the Small Business and Work Opportunity Tax
Act of 2007. Here are six changes affecting
One lucrative provision in the new law for businesses is an
increase in the "Section 179" first-year depreciation
allowance for equipment and software. Under this tax break,
you can immediately deduct 100 percent of the cost of most new
and used business assets other than real estate.
new law extends the current favorable Section 179 deduction
rules through the 2010 tax year and makes some favorable
changes as well:
- Maximum Deduction Increased to $125,000.
For tax years beginning in 2007, the maximum Section
179 deduction is generally increased to $125,000 (up from
the $112,000 figure that applied before the new law). For
tax years 2008 through 2010, the $125,000 amount will be
indexed for inflation.
- Liberalized Phase-Out Rules. If a taxpayer
adds qualifying property (typically equipment and software)
in excess of the annual threshold, the maximum Section 179
deduction for the year gets reduced (phased out). For tax
years beginning in 2007, the phase-out threshold is
generally increased to $500,000 of qualifying property (up
from the $450,000 threshold that applied before the law).
The $500,000 amount will be indexed for inflation for tax
years 2008 through 2010.
- Most Software Qualifies for the Deduction.
The provision that allows Section 179 deductions for
the cost of most off-the-shelf software products is extended
through the 2010 tax year.
- Favorable Amended Return Rules Extended. A
provision that allows Section 179 elections to be changed or
revoked on amended returns is extended through tax years
beginning in 2010.
Key Point: Unless Congress takes further action the
unfavorable "old-law" rules will kick back in starting with
tax year 2011. Under the old-law rules, the maximum annual
Section 179 deduction will fall back to $25,000. The deduction
phase-out threshold will decrease to only $200,000. Software
costs will be ineligible, except for software that is bundled
with qualifying hardware. Finally, taxpayers will not be
allowed to change or revoke Section 179 elections on amended
Work Opportunity Tax Credit is intended to give employers a
tax incentive to hire members of certain targeted groups of
people, such as veterans, high-risk youths and welfare
recipients. Unfortunately, the rules are very complicated.
In a nutshell, the credit amount is generally based on
a limited amount of wages paid to qualified employees for
limited periods. It was scheduled to expire for wages paid to
employees who begin work after 12/31/07. Now, the new law
extends the Work Opportunity Tax Credit for an extra 44 months
to cover wages paid to qualified employees who begin work
before 9/1/11. The new law also adds some new
targeted groups, such as qualified disabled veterans.
Effective Dates: For wages paid to certain
types of qualified employees who begin work after 5/25/07 and
more generally, for wages paid to qualified employees who
begin work after 12/31/07.
tax law, employers can receive a business tax credit for their
portion of Social Security and Medicare
taxes (collectively referred to as FICA) paid on employee
cash tips, which are in excess of amounts used to meet federal
minimum wage standards. The Small Business and Work
Opportunity Tax Act includes a provision to ensure
that the employer tip credit won't be reduced when the federal
minimum wage goes up, which is scheduled to happen in stages
over the next two years.
Effective Date: For tips received on
services performed after 12/31/06.
Small Business and Work Opportunity Tax Act includes
a new provision that allows both individual and corporate
alternative minimum tax (AMT) liabilities to be reduced by the
Work Opportunity Tax Credit and the employer tip credit.
Effective Date: For credits generated in
taxable years beginning after 12/31/06 and carrybacks of such
Small Business and Work Opportunity Tax Act made
several favorable changes to the federal income tax
rules that apply to businesses operating as S
corporations, including banks. For an extensive discussion of
these changes, click here.
unincorporated husband-wife joint venture, which is treated as
for federal tax purposes, must file an annual Form 1065
partnership return and issue each spouse a separate Schedule
K-1. Since partnership returns are complex, this is a tax
compliance headache. The Small Business and Work
Opportunity Tax Act includes a new rule that allows some
husband-wife ventures to elect out of the partnership rules
for federal tax purposes. To be eligible, the spouses must
file jointly and the operation must be a qualified joint
The new law includes
- Extend enhanced
Section 179 deductions for qualified property in the
Gulf Opportunity Zone (GO Zone), which includes areas
devastated by Hurricanes Katrina and Rita.
- Extend and expand
special low-income housing credit rules for the GO
- Establish special
tax-exempt bond financing rules for loans to repair
and reconstruct residences in the GO
A qualified joint venture is a trade or business operation
- The husband and wife are the only members of the
- Both spouses materially participate in the venture's
trade or business, and
- Both spouses agree to elect out of the partnership tax
rules for the venture.
After electing out, the spouses must separately report
their respective shares of the federal income tax items from
the venture on the appropriate IRS forms (for example, on
separate Schedules C). Similarly, the spouses must separately
report their respective shares of net self-employment income
from the venture on separate Schedules SE. Each spouse will
then receive credit for his or her share of the net
self-employment income for Social Security benefit eligibility
Effective Date: Tax years beginning after