At the end of May 2007 new tax legislation was signed into law. The following are some of the highlights (and lowlights) of the new legislation:
Small Business Expensing. The new law extends and expands the Code Sec. 179 enhanced expensing provisions through 2010. It provides for an immediate 2007 increase in the expensing limit from $112,000 to $125,000, with the phase-out level increasing from $450,000 to $500,000. The amount is also indexed for inflation for tax years beginning after 2007 and before 2011.
Work Opportunity Tax Credit (WOTC). The new law extends the WOTC for 3 1/2 years through August 31, 2011. It also expands the WOTC to allow the credit to employers who hire disabled veterans and individuals in rural counties that have suffered population declines.
GO Zone Businesses. The new law extends special 179 expensing for Go Zone businesses
(those devastated by Katrina) through 2008.
Family Business Tax Simplification. Under the new law, a married couple who operates a joint venture and who files a joint return can elect not to be treated as a partnership for federal tax purposes. This treatment is available for tax years beginning after December 31, 2006. Each spouse would take into account his or her share of income, gain, loss, and other items as a sole proprietor. They would not have to file a partnership return (Form 1065) and report two Schedule K-1s. Instead, the couple would each report their share of income on Form 1040, Schedule C.
Age for kiddie tax applicability increased. Effective for tax years beginning with 2008, the kiddie tax is expanded to apply to any child who is 18 years old or is a full time student over the age of 18, but under age 24. If a child is over the age of 17 (or 18 if a student), the kiddie tax will not apply if the child provides more than half of his or her own support through earned income (such as wages). Thus, beginning in the 2008 calendar year, the net investment income of a child will be subject to the kiddie tax under the following circumstances, respectively, assuming that he or she has a living parent and does not file a joint return:
- 17-year-old or younger —will continue to be subject to the kiddie tax regardless of the amount of his or her own support provided with earned income;
- 18-year-old —subject to the kiddie tax unless the child provides more than half of his or her own support with earned income;
- 19- to 23-year-old student —subject to kiddie tax unless the child provides more than half of his or her own support with earned income.
New Penalty Applies for Filing Erroneous Refund or Credit Claims. A 20 percent penalty applies to erroneous income tax refund or credit claims made for an “excessive amount” that are filed without any reasonable basis. The penalty is applied to the excessive amount of the claim, which is the amount by which the claim exceeds the amount allowable.