Congress Enacts New Tax Law

After being vetoed in the Budget Resolution on Iraq, the Small Business and Work Opportunity Tax Act of 2007 was signed into law on May 25. The following and other changes will be discussed in greater detail in the following upcoming AICPA and Surgent McCoy seminars:

The enhanced expensing level under §179 is extended one year through 2011, but the annual dollar limitation has been immediately reset to $125,000. The dollar amount of qualifying property placed in service for the year at which the expensing limitation begins to phase out is likewise immediately reset to $500,000. Together, these provisions have the effect of raising the dollar level at which the expensing is fully phased out to $625,000.

There are a number of S corporation reforms that are pro-taxpayer, the most important of these is that the passive investment income category will be narrowed by excluding all capital gains, including those from stock and securities, from the category of passive investment income.

Husband and wife partnerships may now avoid the expense of a Form 1065 preparation by filing separate Schedule Cs on a joint return.  The provision generally permits a qualified joint venture (whose only members are a husband and wife filing a joint return) not to be treated as a partnership for federal tax purposes. A qualified joint venture is a joint venture involving the conduct of a trade or business if: (i) the only members of the joint venture are a husband and wife; (ii) both spouses materially participate in the trade or business; and (iii) both spouses elect to have the provision apply. All items of income, gain, loss, deduction and credit are divided between the spouses in accordance with their respective interests in the venture. Each spouse takes into account his or her respective share of these items as a sole proprietor.

To pay for some of the benefits in part, the kiddie tax age threshold has again been bumped up. Beginning with taxable years beginning after May 25 – generally calendar year 2008 – a kiddie will generally include children who are age 18 as of the close of the calendar year in which the taxable year of the taxpayer begins, or who are students who have not attained the age of 24 as of the close of such calendar year. This extended class is subject to kiddie tax procedures only if a child’s earned income for such taxable year does not exceed one-half of the amount of the parents’ support.