News

Dear Client:

As we often tell our clients, “tax season does not end on April 15.” That’s true for a lot of reasons. This year, it’s even more appropriate because Congress has just passed a new package of tax incentives. Many of the tax breaks are targeted to businesses. That’s good news, especially for small businesses. The offsets, which are revenue raisers to pay for the tax cuts, primarily hit individuals. However, we’re here to help. We can help you craft a tax strategy that maximizes the benefits of the new law.

$8 billion in tax cuts

The Small Business and Work Opportunity Act of 2007, which passed Congress on May 24 and was signed into law by President Bush on May 25, gives businesses nearly $5 billion in tax cuts over a 10-year period. Through the Congressional budget rules, however, the tax advantages to small business over the next five years are even more generous: over $8 billion.

All of the small business provisions are designed to help businesses absorb the cost of a higher federal minimum wage. The new law gradually raises the federal minimum wage from $5.15 an hour to $7.25 an hour over the next two years. Unlike past tax cuts, this one is fully offset. Those are the revenue raisers we mentioned earlier. The revenue raisers are expected to bring in $5 billion to pay for business tax cuts.

Kiddie tax

Let’s first take a look at a change in the new law that could impact you if you have children.

The “kiddie tax” rules have prevented most children under the age of 18 from using their low tax bracket to shelter significant amounts of investment income. Under those rules, investment income over a small amount is taxed at their parent’s marginal tax rate, as if earned by the parent. The child is not allowed a personal exemption if he or she can be claimed as a dependent on his or her parents’ return. However, the child can use up to $850 for 2007, of his or her standard deduction to offset unearned income. As a result, only unearned income in excess of $1,700 for 2007 is taxed at the parents’ top marginal rate.

Until last year, the kiddie tax applied to children under the age of 14 with unearned income. In 2006, Congress raised the age to under 18. The new law raises it to under age 19 (under age 24 for full-time students).

When Congress raised the age in 2006, it did so retroactively to January 1, 2006. This time, Congress makes the change prospective. It kicks-in for 2008. The difference is critical. Unlike in 2006, you have time to adjust your tax planning. This is especially important if you have a child starting college next year and you were planning to use appreciated investment assets to pay for tuition. Fortunately, we have between now and the end of the year to revise your tax plans.

Business tax incentives

As we mentioned, the small business tax incentives are intended to help businesses pay for the higher minimum wage. They are not as generous as in past tax cuts, but with careful planning and maximum utilization, we can help your business get the greatest tax savings.

Small business expensing. Congress significantly extended and expanded small business expensing. The tax laws allow you to deduct some business expenses that would otherwise have to be depreciated. Generally, you can deduct up to $112,000 in qualifying expenditures for property placed in service in 2007. There is a $450,000 investment limitation. The new law raises the dollar limitation from $112,000 to $125,000 and the income limitation from $450,000 to $500,000, retroactive to the start of 2007. The amounts are also indexed for inflation.

If you have been debating whether to make a business expenditure, the increased expensing rules could make that purchase much more attractive.

Work Opportunity Tax Credit. The Work Opportunity Tax Credit (WOTC) is one of several tax incentives to encourage employers to hire challenged individuals. Some are challenged by physical disabilities. Others are challenged economically. The new law extends the credit to cover more veterans and some other target groups. In return, employers that hire individuals from these targeted groups get some generous tax savings.

More business incentives. The new law also preserves the FICA tip tax credit at its present rate and allows married couples who operate a joint venture and who file a joint return to elect not to be treated as a partnership for federal tax purposes. Additionally, the new law includes a package of S corporation reforms. While these provisions are complex, they are worth a careful look since each of them provides a tax break previously unavailable.

Katrina recovery

One of the ways the federal government is helping Hurricane Katrina taxpayers is by offering them tax breaks to rebuild their homes and businesses. The new law expands some housing tax incentives.

If you have any questions about the Small Business and Work Opportunity Tax Act of 2007, please call our office today. We can sit down and review, in detail, the new law and how it affects you.

Sincerely yours,

Hannis T. Bourgeois, LLP