In Taxation, Certainty is an Illusion

With the second half of 2007 now well under way, it’s time to start thinking about your year-end tax bill. Typically, this involves taking stock of where your income stands now and what you expect to earn over the next five months, followed by devising strategies to minimize your tax bite for the year. All-in-all, this is a fairly routine activity at this time of year, except for this: Congress has yet to see a tax code it doesn’t want to change - and 2007 is no exception.

As you probably know, Congress passed an increase to the Minimum Wage in 2007. In order to get final passage, the congressional leadership included a number of small business tax breaks along with a few revenue raisers. Before you begin your planning process this year, be sure to consider the following changes to the tax code.

Small Business Expensing of Assets

Effective for tax years beginning in 2007 and through 2010, the new law increases the amount of fixed assets you can expense to $125,000. After 2007, this amount is indexed for inflation. Additionally, the threshold at which you begin to lose the deduction is increased to $500,000 and indexed for inflation thereafter. The threshold limitation is the point at which you must start reducing the amount expensed on a dollar for dollar basis. For example, if you add only $495,000 in qualifying assets in 2007, the amount you can expense is $125,000. If, however, you add $550,000 in qualifying assets, you can expense only $75,000 ($125,000 less the 50k difference between $550,000 and $500,000).

WOTC

The new law expands the Work Opportunities Tax Credit (WOTC) to more individuals. In particular, it covers more veterans, high-risk youth, and individuals needing vocational rehabilitation training. Additionally, qualified wages are increased to $12,000 for the expanded veteran’s group and the WOTC can also be used to offset the Alternative Minimum Tax. These changes apply to wages paid to individuals who begin work after December 31, 2007 and before September 1, 2011.

Partnerships

Under the new law, married couples who operate a joint venture together are not required to treat the entity as a partnership. Hence, no separate return is required. However, the law requires that both spouses materially participate in the venture. As a reminder, Federal law only recognizes marriages between two people of opposite sex.

Gulf Coast Recovery Incentives

Shortly after Hurricane Katrina hit the United States Gulf Coast, Congress enacted measures to spur reinvestment in the area. These included higher expensing elections for fixed assets and expanded low-income housing credits. The new law extends these incentives for another year.

All tallied, the tax breaks granted by the new law total some $4.8 billion. The entire amount is offset by revenue-raising measures that include:

• Application of the “Kiddie Tax” rules to unearned income of children under age 19 who do not file a joint return, unless the child is a full-time student. The provisions of the tax apply to full-time students who are under age 24. This provision is effective beginning in 2008;
• Increasing IRS user fees;
• Increasing IRS bad check fees;
• Increasing penalties on preparers and taxpayers.

To describe certainty in tax law as ‘illusory’ is really an understatement! This year, the changes are not as voluminous as in some previous ones, but they can have a significant impact on your tax bill. Even those changes that take effect in later years present planning challenges for 2007. Let’s get together and talk about how to best minimize your 2007 taxes before it’s too late.

Have a great August.

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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