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2007 Tax Law Changes

  Important Changes
  Affecting Businesses

On 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

Minimum Wage Goes Up

    Under the new law, the hourly minimum wage will increase from $5.15 to $7.25 over the next two years according to this schedule:
    1. The first increase to $5.85 will go into effect on July 24, 2007 (60 days after the bill was signed into law).
    2. Next, the minimum wage will rise to $6.55 one year later.
    3. The final increase will occur two years later in July of 2009, when the minimum wage will rise to $7.25.
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.

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 businesses.

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 businesses:

Change #1:
Section 179 Deduction

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.

The 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 returns.

Change #2: 
Work Opportunity Tax Credit 

The 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.

Change #3: 
Employer Tip Credit 

Under 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.

Change #4: 
Limited AMT Relief 

The 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 credits.

Change #5:
S Corporations

The 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.

Change #6: 
Spouses in Business

An unincorporated husband-wife joint venture, which is treated as

Gulf Opportunity Zone
Tax Incentives

The new law includes provisions that:

  • 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 Zone.
  • Establish special tax-exempt bond financing rules for loans to repair and reconstruct residences in the GO Zone.
a partnership 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 venture.

A qualified joint venture is a trade or business operation in which:

  • The husband and wife are the only members of the venture,
  • 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 purposes.

 Effective Date: Tax years beginning after 12/31/06. Ronald J. Cappuccio, J.D., LL.M.(Tax) 1800 Chapel Avenue West Suite 128 Cherry Hill, NJ 08002 Phone:(856) 665-2121      Fax: (856) 665-9005 Email:

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