The Small Business and Work Opportunity Tax Act of 2007

June 22, 2007

 On May 25, 2007, President Bush signed into law the Small Business and Work Opportunity Tax Act of 2007. The Act makes several changes to the tax laws primarily to provide tax benefits to small businesses, while revenue raising provisions in the Act include changes to the so-called "kiddie tax". The Act's key provisions include:
 
Increase in Dollar and Investment Limitations for Code Section 179 Expensing
The Act increases the base $100,000 limitation to $125,000 for tax years 2007 through 2010. The maximum deduction is phased out by the amount by which all qualifying property placed in service during a tax year exceeds the investment limitation. The Act increases the investment limitation to $500,000 for tax years beginning in 2007 through 2010. The $500,000 is indexed annually for inflation for tax years after 2007.
 
Extension of the Work Opportunity Tax Credit
This tax credit, which encourages employers to hire individuals from certain populations with economic challenges by providing credits for certain wages paid, was set to expire for employees hired beginning in 2008. The Act extends the credit through August of 2011.
 
Family Business Simplification
The Act provides that for tax years beginning in 2007, a husband and wife who jointly own and operate an unincorporated business and file a joint tax return can elect not to be treated as a partnership for federal tax purposes. This will alleviate the need for married taxpayers that are in business together to file a partnership return (Form 1065) and receive K-1's. By taking advantage of the new provision, all items will be reported on Schedule C of the 1040.
 
S corporations - Passive Investment Income
The Act alleviates some of the burden for entities that convert from a C corporation to an S corporation by providing that capital gain from the sale of stock or securities will no longer be treated as passive investment income. This provision will apply in 2008 for calendar year taxpayers.
 
Kiddie Tax Changes
The Act extends the reach of the "kiddie tax" to all children under age 19 and students under age 24. These changes affect calendar year taxpayers beginning in 2008.
 
 If you have questions or would like additional information, please contact Christine Worthen, a shareholder
and Chair of Eaton Peabody's Tax Practice Group.
 
This alert is provided as general information, and is not a substitute for legal or other professional advice.