Volume 28 Number 3, Summer 2007
Congress Passes Tax Cuts for Small
Businesses
Proposed Changes to SUV Tax
Breaks
Charities - Beware of
Cyberscammers
Vacation Home Sales are Not
Like-Kind Exchange
Federal Minimum Wage Increased
The Better Way
IRS Resurrects Random Audits
Congress Passes Tax Cuts for Small
Businesses
Nearly
$5 billion in small business tax cuts are
now law. Just before Memorial Day weekend, Congress passed and President
Bush signed the Small Business Work Opportunity Tax Act of 2007 (H.R.
2206). While the federal minimum wage will rise to $7.25 over two years,
some valuable tax breaks will help employers absorb the higher minimum
wage. The new law also includes $5 billion in revenue raisers to pay for
the tax cuts.
Small business tax breaks.
One of the first priorities of the new Democratic-controlled Congress was to
raise the minimum wage. The House passed a minimum wage bill in January. The
Senate, however, wanted to add some tax incentives to help small businesses
pay for the higher minimum wage. The two chambers passed different bills but
ultimately decided on this package of tax breaks.
That was the easy part. The
tax breaks would have been enacted sooner but they were attached to the
controversial Iraq war spending bill. President Bush vetoed the first war
spending bill in early May because it included a timetable for withdrawing
troops from Iraq. Democrats later dropped that language. A final war spending
bill, with these tax cuts, passed Congress on May 24 and was signed by
President Bush on May 25.
Minimum wage.
The minimum wage increases gradually over the next two years. It jumped to
$5.85 per hour beginning July 24, 2007. It rises to $6.55 starting a year
later and $7.25 beginning two years later.
Highlights.
All businesses - not just small businesses - can take advantage of the new tax
breaks. Here are some highlights:
d
Small business expensing: In good news for small businesses, the dollar
limitation expensing under Code Sec. 179 is increased immediately to $125,000.
The investment limitation also jumps to $500,000. The higher amounts are
indexed for inflation and are available through 2010. Taxpayers rebuilding
after Hurricane Katrina may be eligible for enhanced Code Sec. 179 expensing
in their area. If you're planning some business purchases, we can help you
maximize your tax savings under Code Sec. 179.
d
WOTC: One way Congress is helping businesses absorb the costs of a higher
minimum wage is to expand the Work Opportunity Tax Credit (WOTC). This credit
rewards employers for hiring economically-challenged individuals. The credit
is expanded to cover disabled veterans as well as more high-risk young people
and individuals who need vocational rehabilitation and is extended 3 1/2
years. If you aren't familiar with the WOTC, give our office a call. It could
be a valuable tax break for your business.
d
FICA tip credit: Under the new law, the employer's FICA tip credit will not be
reduced because of the increase in the federal minimum wage. Employers can
base the tip credit on a minimum wage of $5.15 per hour despite the increase
to $7.25 over the next two years.
d
Joint ventures: Married couples who operate a joint venture and who file a
joint return can now elect not to be treated as a partnership for federal tax
purposes. This change is intended to make sure that both spouses get credit
for paying Social Security and Medicare taxes.
More tax breaks.
S corporations are a very popular way of doing business. Some provisions in
the new law make them even more attractive. The new law modifies the passive
investment income rules and other restrictions to help small businesses keep
the tax advantages of S corporation status. Other provisions in the new law
affect banks that operate as S corporations.
Some tax breaks in the new
law are targeted to Hurricane Katrina victims. Besides the special expensing
treatment for Hurricane Katrina victims, the new law also extends the time
allowed for building low-income housing through 2010.
Offsets.
All of the tax breaks are "offsets." This means that other sources of revenue
pay for them. In this case, Congress needed to find $5 billion in offsets to
pay for the $5 billion in cuts.
The biggest offset is a
change in the so-called kiddie tax rules. When a child under the age of 18 has
unearned investment income in excess of a certain amount and does not file a
joint return, the kiddie tax may tax part of that income at the parent's tax
rate instead of the child's tax rate. Congress raised the age threshold from
under 14 to under 18 last year. The new law raises it to under 19 (under 24 if
a student). This change is effective for most taxpayers in 2008. This change
is very significant and could impact many college savings plans. Fortunately,
the change is not effective for most taxpayers until next year. There's still
time to adjust your tax strategy.
Another major offset impacts
employers. The new law limits an employer's right to a collection due process
(CDP) hearing before the IRS levies to collect unpaid employment taxes.
Congress tightened the CDP eligibility rules because of fears of abuses.
Other revenue raisers
include:
d
Higher IRS bad check fees;
d
Expanded return preparer penalties; and
d
A new erroneous refund claim penalty.
Congress also modified the
rule that the IRS must stop charging interest and filing related penalties if
it fails to notify a taxpayer about a deficiency
within 18 months after the taxpayer filed a return. The new law doubles the
timeframe to 36 months.
Although the new law is fully offset, the tax breaks over the first five years
are greater than the offsets. The tax cuts and offsets balance one another
over 10 years.
Planning opportunities. Every new tax law represents planning opportunities and the Small Business Work Opportunity and
Tax Act of 2007 is no different. Don't miss out on some potentially valuable
tax savings. If you have any questions, give our office a call today and we
can discuss in detail the important tax breaks in this new law.
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Proposed Changes to
SUV Tax Breaks
A
provision in the pending
Renewable Energy and Energy Conservation Tax Act of 2007 (H.R. 2776)
may eliminate generous and controversial SUV tax breaks that allow small
businesses to write off up to $25,000 of the purchase of heavy SUVs and
large pickups through expensing and depreciation deductions. Heavy SUVs
(those with a gross vehicle weight-GVW-rating of more than 6,000 pounds
and built on a truck chassis) have escaped the reach of depreciation
dollar caps that have affected "passenger autos" because they conveniently
fall outside the definition of a "passenger" automobile.
The passage of H.R. 2776 as
currently drafted would subject SUVs with a GVW of 6,000 to 14,000 pounds,
purchased in 2007 for business use, to the annual luxury auto depreciation and
expensing limits. The bill also would repeal the special $25,000 heavy SUV
expensing limit. These changes would be effective for property placed in
service after December 31, 2007.
These changes are only proposed at this time, but if you
are considering purchasing a heavy SUV in the next year or two, you may want
to buy it in 2007 to avoid the possible elimination of the $25,000 deduction.
Contact your tax advisor at SEK&Co for the latest in this and other tax law
changes that may affect you.
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Charities - Beware of
Cyberscammers
Security
researchers at Symantec announced recently that
they'd detected small transactions made with stolen credit card numbers,
funneling money to some unexpected destinations: charities like Christian Aid,
Islamic Relief and the Red Cross.
These cyberscammers aren't
suffering from pangs of conscience, says Zulfikar Ramzam, a senior principal
researcher at Symantec. He speculates that the money transfers, which move
only $5 or $10, are used to test whether stolen account information is still
valid and usable.
Ramzam says that identity
thieves frequently test credit card information by moving small sums of money,
and banks have responded by scanning transactions records looking for unusual
recipients of what look like test transactions. "Even a $5 transaction can
raise eyebrows if it goes to someone the person has never done business with
before, located in, say, Romania," Ramzam says. "Small donations to charities
are less suspicious, even if the donor has never made them before."
Given that Symantec's
researchers see the charity test as a growing trend, the tactic could mean
significant sums of money moving into philanthropic coffers, if only in $5 and
$10 increments. But this is potentially very expensive for charities.
Charities will have to deal with refunds after fraud is detected and face
potentially higher discount rates. A reasonable defense may be to return to
the user a “donation accepted” message even if the credit card is marked as
stolen/fraudulent. That way, charity sites will lose their value to the
scammers for this activity.
Ramzam admits that the motivation for the donations is
still a subject of speculation. He says, "It could be that they've all
suddenly become kindhearted. But I doubt it."
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Vacation Home Sales are
Not Like-Kind Exchange
 V acation
homes that are not held strictly for investment
purposes do not qualify for like-kind exchange treatment under Code Sec. 1031.
The Tax Court recently ruled that just because a vacation property will
increase quickly in value does not make it "an investment" for purposes of
qualifying it for like-kind exchange treatment. Especially if the owner uses
the property for a significant period of time and doesn't rent the property,
it's hard to make the "investment" label stick.
In the recent case, the Tax
Court held that the exchange of vacation home properties, one for another,
will not qualify for tax-free like-kind treatment under Code Sec. 1031 if the
properties are not held primarily for use in a trade or business, or for
investment purposes. Even if the residence is held in part by an expectation
that the property's value will appreciate, the motivation is insufficient to
qualify the exchange for tax-deferred treatment under Code Sec. 1031. The mere
expectation or hope that the property will be sold at a gain will not
establish an "investment intent" if the taxpayer is using the property as a
residence.
Primary purpose.
The Tax Court set out some guidelines if you plan to maximize the tax laws on
any vacation property that you own. If the primary purpose in acquiring and
holding the properties was to enjoy use of the properties as vacation homes,
or secondary residences, the property is not held for investment purposes.
Evidence that the property is used as a vacation retreat, personal
improvements are made, neither the new or old property is rented out, and no
claims for depreciation or investment interest expenses are made will signal
that the property is used for personal purposes rather than investment.
Personal use of property is not compatible with treating it as "held for
investment" under Code Sec. 1031.
As the Tax Court stated, "The holding of a primary or
secondary (e.g. vacation) residence motivated in part by an expectation that
the property will appreciate in value is insufficient to justify the
classification of that property as property 'held for investment' under Code
Sec. 212(2) and, by analogy, Code Sec. 1031."
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Federal Minimum
Wage Increased
The
federal minimum wage rose from $5.15 to $5.85
per hour on July 24, 2007, the first of three increases that will take place
over the next two years.
The federal minimum wage will
rise from $5.85 to $7.25 per hour in two additional steps:
$6.55 per hour on July 24,
2008
$7.25 per hour on July 24,
2009
Employees last saw an
increase in the federal minimum wage in 1997. Since then, 32 states and the
District of Columbia have raised their minimum wages higher than the new
federal minimum wage. Therefore, they won't be affected by the first step of
the federal increase.
When rates differ.
Where state and federal minimum wage rates differ, the higher rate prevails.
The 32 states and the District of Columbia which have minimum wage rates that
equal or exceed the federal rate on July 24, 2007, must continue to pay the
state rate as long as it remains higher than the federal rate. In selected
states, some employers currently paying a state-authorized lower minimum wage
based on their size or offering benefits will be affected by the federal
increase.
If the federal rate increases
above the state rate, the federal rate applies.
Employers -- especially those
who operate in several different states -- will have to keep aware of a
changing environment as federal and state rates crisscross in the years ahead.
CAUTION!
The rules regarding minimum wages can be complicated and vary by jurisdiction.
In addition, certain exceptions exist for tipped employees, students, various
industries, etc. The information provided here is designed to be general in
nature. Please contact us if you have any questions regarding how minimum wage
regulations may apply to you.
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The Better Way
Hi Bracket had used the same
investment advisor and brokerage firm for a long time but his move to a
retirement area necessitated a change. He carefully selected a new firm
and, since he was pleased with his investments, instructed the old firm to
transfer his investments to the new firm.
His new advisor convinced him that his change in lifestyle called for a change
in investment philosophy. He would reduce risk and provide more cash flow for
retirement. Many of his investments were sold and the proceeds reinvested in
the new plan, which was working out well. Sounds OK so far!
When he got his tax information for the year, he was surprised that his gains
and losses were not furnished. This is because the sale was reported by his
new broker but the cost was known by the former broker (estranged by now). He
had a mess and incurred a lot of expense in reconstructing his tax basis
(cost).
The Better Way would be to make sure tax basis was
transferred also. Tax basis is generally the cost of an investment and is
affected by mergers, splits, stock dividends, reorganizations and reinvested
earnings. Most individuals do not track tax basis so it is essential that this
is done by investment advisors. But if not or if you hold your own
investments--you're on your own.
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IRS Resurrects Random Audits
The
IRS has announced plans to return to its
practice of selecting random tax returns for audits this fall. Beginning
in October, the service will target approximately 50,000 income tax
returns from 2006.
The random audit process had
been discontinued five years ago when the IRS began its mission to be a
kinder, gentler agency.
Traditionally, a random audit
is a full-blown audit where the chosen taxpayer is subjected to an examination
of every item on the tax return and must provide justification for each item.
In this go-round, the IRS has indicated that many of the randomly audited
taxpayers will not face the rigorous line-by-line audit.
It is expected that
approximately 8,000 returns examined by the IRS will require no action on the
part of the taxpayer. Approximately 9,000 taxpayers will be able to respond to
audit inquiries by mail. The remaining 30,000 or so taxpayers will be required
to face their inquisitors and explain information on their tax returns.
The taxpayers selected for
random audits are not suspected scofflaws. They are selected completely at
random and the audits are used to gather information about taxpayers norms.
If you receive a call from
the IRS, be sure to contact us. We can help you with your audit experience.
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