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Nab tax breaks, dodge traps, in new small biz law

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in Compensation and Benefits,Human Resources,Small Business Tax,Small Business Tax Deduction Strategies

Congress finally passed, and the president signed, small business tax reforms after months of political fracas over other parts of the legislation. But don’t be misled by the low profile given this new tax legislation.

Advice: The new law opens up tax-saving opportunities for savvy entrepreneurs, but it also includes some dangerous pitfalls. One onerous provision in the law could adversely affect millions of taxpayers.

Here are some of the key changes in the new “small biz” tax law, the Small Business and Work Opportunity Tax Act of 2007.

New tax-saving opportunities

  • Section 179 deduction: The maximum amount that a business can “expense” (i.e., currently deduct) this year increases to $125,000 with enhancements through 2010. (Previously, the maximum was set at $112,000 for the 2007 tax year.) Also, the phaseout threshold for 2007 increases from $450,000 to $500,000.
  • Gulf Opportunity (GO) Zone expensing: In a companion provision, larger Sec. 179 deductions for businesses in areas hit hard by Gulf Coast hurricanes have been extended through 2008.
  • Work Opportunity Tax Credit (WOTC): The new law extends the enhanced worker credit for 44 months through Aug. 31, 2011. (The Tax Relief and Health Care Act of 2006 retroactively revived the WOTC.) It also expands the list of qualified job-hires to disabled veterans and individuals from damaged counties.
  • S corporation reforms: The law closes some traps facing S corps and also reduces the tax bite on S corp shareholders (see box).
  • Family business simplification: A married couple operating a joint venture can elect not to be treated as a partnership for tax years beginning after 2006. Instead of filing a partnership return and two K-1s, couples can individually report each share of income on Schedule C as self-employeds.
  • FICA tip credit: Despite the minimum wage increase over the next two years to $7.25 per hour, the employer’s tip credit still will be based on a minimum wage of $5.15 per hour. Thus, the tip credit for employers will not be reduced. This provision applies to the tax years beginning after 2006.

New tax pitfalls

  • Kiddie tax: Just last year, Congress raised the kiddie-tax threshold from age 14 to 18. Now it’s been raised again to age 19 or up to age 24 for full-time students.
  • Suspended interest: The IRS now has 36 months—twice as long as before—to stop charging interest and filing related penalties if it fails to notify you about a tax deficiency.
  • Collection Due Process (CDP) hearings: The new law eliminates the requirement that the IRS must hold a CDP hearing before issuing a levy on delinquent-employment taxes.
  • Bad checks: For checks of less than $1,250, the minimum bad-check penalty is now $25.
  • Tax-preparer penalties: The new law expands preparer penalties to all types of returns, including returns for employment taxes, estate and gift taxes and excise taxes. It also raises the penalty amounts and toughens the rules for understating liability.



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