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June 20, 2007

TAX ALERT
SMALL BUSINESS AND WORK OPPORTUNITY TAX ACT OF 2007

Dear Clients and Friends of the Firm:

On May 25, the President signed the Small Business and Work Opportunity Tax Act of 2007 (“SBWOTA”). Passed in conjunction with legislation to continue funding the war in Iraq and to raise the minimum hourly wage, the tax-related provisions are designed in part to provide benefits to small businesses likely to be hit hard by the minimum wage increase.

Following are highlights of key provisions affecting businesses, individuals, Gulf Opportunity Zone (“GO Zone”) incentives and other areas of tax law.

Businesses
Effective for years beginning after 2006, the Section 179 election to expense property in its initial year (rather than depreciate it) is extended through 2010 and the amount is increased from $100,000 to $125,000. The expense deduction begins to phase out if more than $500,000 of eligible property is placed in service during the year (up from $400,000). These amounts will be adjusted annually for inflation.

The Work Opportunity tax credit, which had been set to expire December 31, 2007, is extended until September 30, 2011. This credit is available to businesses that hire employees from targeted groups of individuals, such as veterans, ex-felons, high-risk youth, food stamp and supplemental security income recipients. The new law expands this list to include disabled veterans and individuals in selected rural counties that have suffered significant population losses. If you hire a target employee, your business can receive a 40% tax credit for the first $6,000 paid to that worker. 

Effective for years after 2006, the individual and corporate alternative minimum tax (AMT) limits on the use and carryback of certain credits are waived.  This applies to the Work Opportunity credit and the credit for taxes paid on employee tips. Employers are also now eligible for the full tip credit despite the increase in the minimum wage.

Individuals
The “kiddie tax,” which subjects children (and now young adults) to tax on most unearned income at their parents’ marginal tax bracket, had recently been expanded to include those under age 18 (up from age 14). SBWOTA broadens that rule to include those who qualify as dependents because they are either under age 19, or under age 24 and a full-time student, if their earned income doesn’t exceed one half of the amount needed for their support.

GO Zone incentives
SBWOTA extends several tax incentives designated for the GO Zone:

• For property placed in service in the GO Zone, the Section 179 election is extended through 2008 and is increased to $225,000.  The deduction begins to phase out if more than $1.1 million of eligible property is placed in service during the year.
• The low-income housing tax credit for GO Zone housing is extended through 2010.
• Tax-exempt bond financing for GO Zone property is expanded to include expenses for all repairs and reconstruction. The provision applies to owner financing provided after May 25, 2007 and before 2011.

Other changes
SBWOTA includes several S corporation and pension provision changes.

Finally, the act subjects tax return preparers to increased levels of penalty for the redefined category of “unreasonable positions” taken on a tax return, as well as for the category of “willful and reckless” tax positions.

Further questions
Please contact us at 212-303-1800 or e-mail us at info@rssmcpa.com if you have any further questions about the Small Business and Work Opportunity Tax Act of 2007.

Sincerely,
Rosen Seymour Shapss Martin & Company LLP

Isidor Hefter, CPA – Tax Partner
Alan M. Willinger, CPA, JD – Tax Partner
Steven J. Eller, CPA, JD – Tax Partner

For information contact:

Alisa Morris
Director of Marketing
(212) 303-1880
amorris@rssmcpa.com