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Congress's best-kept secret ... another new tax bill

Congress recently passed another significant tax bill, but it was overshadowed in the press by the Iraq funding bill to which it was attached (the U.S. Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq Accountability Appropriations Act of 2007, H.R. 2206). The tax bill, titled Small Business and Work Opportunity Tax Act of 2007, includes tax breaks for small businesses and simplified tax reporting for family businesses, but also expands the reach of the "kiddie" tax to older children. (For a good explanation of the bill as enacted, click the following link: Technical Explanation of the Small Business and Work Opportunity Tax Act of 2007 (138 KB). You must have Adobe's Acrobat Reader installed on your computer in order to read this 47-page document.)

The good news

Tax simplification for businesses of married couples. In the past, married taxpayers who jointly own and co-operate a non-corporate business have been required to file a partnership return, complete with Form 1065 and two Schedules K-1, and to report their income as partnership income on their Form 1040 return. However, this requirement has always been counter-intuitive and has therefore caused a great deal of work for the IRS in trying to enforce this unnecessary bureaucratic requirement. The new bill simplifies the tax reporting by allowing a couple to report the business on two Schedules C instead, as if each spouse’s share of the business were a separate sole-proprietorship. The couple still must identify the amount of income and expense attributable to each spouse, but the requirement to file a separate Form 1065 return is eliminated. This change allows the use of Schedule C for reporting income (starting tax year 2007) instead of requiring a partnership return to be filed and the Schedule K-1 from the partnership reported on Schedule E.

Increased limits on first-year depreciation (section 179). The $112,000 allowance for section 179 expensing that would have applied for tax year 2007 is raised to $125,000. Furthermore, the total cost of all property combined can now be $500,000 before it starts to phase out, up from the formerly scheduled $400,000. These unusually high amounts were originally slated to expire after tax year 2010, reverting to a $25,000 allowance with a phase-out starting at $200,000, but are now extended for one more year. For Gulf Opportunity Zone property (property in specified areas of the hurricanes of August 2006), these levels were originally increased for property placed in service by the end of 2007, but this provision is now extended to the end of 2008. The section 179 expense for GO Zone property can therefore be as high as $137,000 for tax year 2007, with the phase-out starting at $1,100,000 total cost. This change affects Forms 2106 and 4562 for 2007.

Work Opportunity Credit extension. The Work Opportunity Credit (which now includes the Welfare-to-Work Credit because of prior legislation) provides a tax credit for employers who hire workers in targeted groups, but was slated to expire after 2007. Under the new tax bill, it is extended to employees who begin work before September 1, 2011. Furthermore, the targeted group for veterans is expanded to include certain veterans with service-connected disabilities. This change affects Form 5884 for 2007. (Form 8861 is eliminated for 2007 and integrated into Form 5884 instead.)

Credit for employers who pay FICA tax on cash tips. An employer gets credit for the amount of FICA paid on tips that, when combined with an employee’s wages, exceed the Federal minimum wage. As a result, the credit is normally reduced when the minimum wage is raised. The new bill freezes the wage used in the computation of the credit to the minimum wage in effect on January 1, 2007 ($5.15 per hour). Therefore, the scheduled increase in minimum wage to $7.25 over a 2-year period will not reduce the credit as it would have otherwise. This change affects Form 8846 for 2007.

AMT relief. Starting tax year 2007, the Work Opportunity Credit and the credit for employer-paid FICA tax on cash tips (both expanded by the tax bill, as described previously) are exempted from limits of the alternative minimum tax. In other words, both credits may now offset the alternative minimum tax. This change affects Form 6251 for 2007.

The bad news

"Kiddie Tax" hit again. Under the "kiddie tax" law, a child’s unearned income exceeding $1,700 (for 2007) is taxed at the parent’s tax rate to prevent parents from benefiting from putting their assets in the names of their children. However, the definition of "child" changed last year to hit children under age 18, rather than just those under age 14. Under the new bill, the tax is extended to children under age 19 (under age 24 if a student). However, this extension does not apply to children whose earned income is no more than half of their support. (The new provisions do not apply until tax year 2008 for most taxpayers because they apply only to tax years starting after the date the bill was enacted. This means that parents have until the end of 2007 to arrange the sale of capital assets held in a child’s name in order to have the sale taxed at the child’s low 5% capital gains tax rate.) This change affects Forms 8615 and 8814 for 2008.

Other provisions

Provisions of less general interest in the new bill include additional extensions and increased benefits for GO Zone activities, a number of benefits for S corporations, a number of revenue-raising provisions including changes in IRS procedures and increased penalties, and several technical changes in pension rules.

Credit form for hybrids added

In response to requests from customers, we are adding Form 8910 to the Standard and Premium Levels for the next tax season. The Alternative Motor Vehicle Credit, provides substantial credit for those who purchase certain targeted vehicles. The credit is available whether or not you use the vehicle for business. Targeted vehicles include

• Hybrid vehicles
• Advanced lean burn technology vehicles
• Alternative fuel vehicles
• Fuel cell vehicles

Because of the complex way the law was written, the amount of credit depends on the specific type of technology, make of vehicle, and number of units the manufacturer has sold. In fact, credit for the most popular hybrid vehicles is subject to a phaseout percentage, making it advantageous for you to purchase vehicles made by new entrants into the field. As a result, the credit can range from a few hundred dollars to several thousand dollars.

Remember e-file

If you aren’t yet offering e-file to your clients, you may be missing a good profit opportunity for your tax practice. As the IRS increases the publicity for their e-file program, more of your customers may want to e-file their returns. Tax Preparer provides integrated e-file software that makes e-filing no more complicated than printing a return and logging onto the internet. For more information about the use of e-file with Tax Preparer, see our web site at howardsoft.com or call us at (858) 454-0121.