Highlights of the Small Business and Work Opportunity Tax Act of 2007

On May 25, 2007, President Bush signed H.R. 2206 into law.  This Iraq supplemental spending measure includes a minimum wage increase and a tax title (Title VIII B) called the “Small Business and Work Opportunity Tax Act of 2007.”  The small business tax incentives in this tax title include general provisions affecting small businesses across-the-board, Gulf Opportunity Zone tax incentives, and some favorable changes to the rules governing S corporations.  However, the 2007 Small Business Act also includes a number of revenue raisers such as new and enhanced penalties and broadening of the kiddie tax, among other items.

Among the general business incentives covered in Small Business and Work Opportunity Tax Act of 2007 are:

• Increases the maximum amount that a taxpayer can deduct annually as a Code Section 179 expense from $100,000 to $125,000 for tax years beginning after 2006.  It also increases the $400,000 phase-out threshold amount to $500,000 for tax years beginning after 2006.

• Extends the inclusion of off-the-shelf computer software in the definition of Code Section 179 property for one additional year, that is, for software that is placed in service in tax years beginning before January 1, 2011.

•  Extends a taxpayer's ability to revoke a Code Section 179 expense election, and any specification contained in the election for one additional year to any tax year beginning before January 1, 2011.

Among the revenue raisers in Small Business and Work Opportunity Tax Act of 2007 are:

• Penalty for bad checks and money orders increased.  For checks or money orders that are less than $1,250, the 2007 Small Business Act increases the minimum penalty to $25 or the amount of the check or money order, whichever is less.

•  The 2007 Small Business Act expands the kiddie tax rules to apply to children age 18, and children over age 18 but under age 24 who are full-time students effective as of January 1, 2008.  Because of the 2007 Small Business Act changes, any planned transfers of income-generating stocks, bonds, and other investments to children age 18, or those age 19-23 who are full-time students, must be reconsidered or postponed to eliminate or decrease the child's unearned income.  Investing a child's funds in investments that produce little or no current taxable income, can help avoid the kiddie tax. These investments include, for example, stocks and mutual funds oriented toward capital growth that produce little or no current income.  You should also consider realizing any capital gain on investments in your 19-23 year old’s account this year to take advantage of the lower tax brackets before the new rates take effect.

Other news:

The full alternative motor vehicle credit will be available for purchases of qualified Ford and Mercury hybrid vehicles at least through September 30, 2007, based on IRS's release of sales figures for such vehicles to retail dealers for the first calendar quarter of 2007.  IRS has reported that, for the quarter ending March 31, 2007, the cumulative number of qualifying vehicles that Ford sold to retail dealers was 5,149, bringing the total of qualifying Ford hybrids reported to date to 27,275.

The IRS has issued guidance on a new-for-2007 choice for non-spouse beneficiaries of an inherited qualified plan account.  These beneficiaries may be able to transfer part (or all) of the deceased employee’s account balance into an inherited IRA.  Under the new guidance, a non-spouse beneficiary can, in most situations, receive payouts from the inherited IRA over his or her lifetime.  This can make an inherited IRA a powerful tax-deferral tool, but expert help is a must to assure that key rules are met (such as when distributions from the inherited IRA must begin).  The one downside is that under the IRS’s latest guidance, company retirement plans may, but are not required to, offer the rollover option for non-spouse benenficiaries.

State of Connecticut Tax News

Energy Star Tax Holiday Effective Immediately

House Bill 7432 was signed into law by Governor M. Jodi Rell on June 4, exempting Energy Star appliances from the sales tax upon passage and exempting the sales of compact fluorescent light bulbs back to June 1, 2007.  Energy Star appliances now exempt from the sales and use tax are:

· Refrigerators and Freezers

· Clothes Washers

· Dishwashers

· Room Air Conditioners

· Dehumidifiers

· Room Air Cleaner Units

· Water Coolers

· Battery Chargers

The new law also makes permanent the existing sales tax holiday on home weatherization products. The Energy Star appliances listed above are sales and use tax-exempt until June 30, 2008. The exemption for compact fluorescent light bulbs does not expire.

Taxpayers who purchased compact flourescent light bulbs or Energy Star appliances on or after the efective dates and paid sales tax on their purchase should return, with a receipt, to the retailer where the bulbs or appliances were purchased for a refund of the tax paid.  Refunds cannot be granted without a receipt.

Please keep in mind that we have described only the highlights of the most important changes in the new law.  Give us a call at your earliest convenience for more details on how you may be affected by this important tax legislation.