Small Business and Work Opportunity Tax Act of 2007

By David & Mary Mellem, EAs

This Act, made Public Law 110-28 by President Bush’s
signature on May 25, 2007, increases the Federal
Minimum Wage and provides some tax changes as well.
It can be found at the government’s web site of

thomas.loc.gov by searching for HR 2206 or by going to
Public Laws and clicking on 110-28. The Minimum wage
information starts on page 134 of the pdf version of
the law and is followed by the tax provisions which
run through page 176 (double spaced, large print,
large margins).

Below are highlights of the minimum wage and tax
provisions of this law.

1) Minimum wage rises:
—a) To $5.85 per hour starting the 60th day after this law was signed. This means the Federal minimum wage goes up to $5.85 starting July 24, 2007.
—b) To $6.55 per hour starting July 24, 2008.
—c) To $7.25 per hour starting July 24, 2009.

2) Section 179 is increased from the current $112,000
to $125,000. The phase-out starts at $500,000. This

higher expensing now runs through 2011 (instead of the
old 2010). The amount will be indexed as it has the
past few years. The right to amend a return to elect
or revoke a §179 deduction is also extended through
2011. Claiming §179 for off-the-shelf software is

also extended through 2011. These provisions are
effective for tax years beginning after December 31,
2006.

3) The TIP credit available for employers of tipped
employees continues to use the old minimum wage of

$5.15 for purposes of its calculation. The credit is
not reduced when the Federal minimum wage goes up.

4) AMT ­ The Work Opportunity Credit and TIP credit
are allowed against AMT for taxable years beginning
after December 31, 2006 and to carrybacks of such

credits.

5) Qualified Joint Venture ­ A “qualified joint
venture” is trade or business operated solely by a
husband and wife where both materially participate,

and both elect to treat the income as outlined here.
A qualified joint venture is not to be treated as a
partnership, all income is divided between the spouses
in accordance with their interests in the venture, and
each spouse reports his/her respective share as if it
was a sole proprietorship including paying

self-employment taxes on such profit. (Not quite a
joint Schedule C like some tax software programs
incorrectly permit, but at least not requiring a
partnership tax return if elected.)

6) Kiddie tax hits again starting with years

beginning after December 31, 2007. The Kiddie tax age
test is changed to closely match the age test used for
dependency determination. An earned income test is
added to the student portion. The Kiddie tax will now
apply to:
—a) Any child who is under age 19 (formerly age 18)

as of the end of the year, and
—b) Any child who is under age 24 and is a full
time student. This child (under age 24 & student) is
NOT subject to Kiddie tax if the child’s earned income
for the year exceeds 50% of the child’s total support

for the year.

7) Work Opportunity Tax Credit is extended through
August 31, 2011. Changes were also made to this
credit for individuals beginning work after May 25,
2007, including:

—a) Increasing the maximum age for “Designated
Community Residents”.
—b) Disabled veterans are part of a targeted group.
—c) Increasing the wage amount for disabled
veterans.

8) Expansions for Gulf Opportunity Zone Property
include a few provisions such as:
—a) Extending §179 time frame from the year 2007
through the year 2008,
—b) Extending period for treating GO Zones as

Difficult Development Areas through 2010 (formerly
2008)

9) For purpose of the passive investment income tax
applicable to an S corporation, passive investment
income is changed effective for tax years beginning

after May 25, 2007:
—a) Gross receipts include only the gain from the
sale of capital assets, not the entire sales price,
—b) Interest charged in the ordinary course of
business is not passive investment income,
—c) Dividends from C corporation stock is not

passive investment to the extent the dividends are
from the corporation’s E&P derived from the active
conduct of a trade or business. (Sounds like the C
corporation is going to have to tell its S corporation
shareholders what income created the E&P.)

10) Restricted bank director stock is not considered
outstanding stock for purposes of meeting the S
corporation definition in §1361. Definitions of“restricted” is found in the Act.

11) Interest paid or accrued on debts incurred by an
electing small business trust to purchase stock in an
S corporation is deductible for taxable years
beginning after December 31, 2006.

12) Suspension of P&I. The time period where IRS

suspends charging P&I until a taxpayer has been
notified of the additional tax is extended from the
current 18 months to 36 months effective for notices
after November 25, 2007.

13) The 2% penalty for bad checks or money orders

increases to a minimum of $25 applicable to checks or
money orders received after May 25, 2007.

14) Tax Preparer Penalties
—a) The verbiage changes from “an income tax return
preparer” to “a tax return preparer”. (This takes 6

pages of the law so it must be important.)
—b) The penalties under §6694 increase for an
understatement due to “unreasonable positions”
(greater of $1,000 of 50% of income derived or to be
derived by the tax preparer) or “willful or reckless

conduct” (greater of $5,000 or 50% of income derived
or to be derived by the tax preparer) effective with
returns or claims filed after May 25, 2007.

15) A new penalty is imposed on taxpayers for filing
an erroneous refund claim and is 20% of the excessive

amount, effective for claims filed after May 25, 2007.

Other provisions exist including:

– Special rule for bank required to change from the
reserve method of accounting on becoming S corporation
– Treatment of the sale of interest in a qualified

subchapter S subsidiary
– Elimination of all earnings and profits attributable
to pre-1983 years for certain corporations (sounds
like a removal of the PTI designation for an S
corporation’s old profits)
– Modification of collection due process procedures
for employment tax liabilities
– Permanent extension of IRS user fees

If you’d like a Word version of this summary as an

attachment to an email, let us know and we’ll be happy
to send it.

This text has been shared with you courtesy of: David& Mary Mellem, EAs & Ashwaubenon Tax Professionals,

920-496-1065 (fax 920-496-9111) davidmellem@yahoo.com,
davidmellemea@yahoo.com, marymellemea@yahoo.com, and
marymellem@yahoo.com.

©2007 Ashwaubenon Tax Professionals. No reproduction
of this article is permitted without the express

consent of Ashwaubenon Tax Professionals, 2140
Holmgren Way, Suite 1040, Green Bay, WI 54304.

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David L. Mellem, EA
Ashwaubenon Tax Professionals
2140 Holmgren Way

Green Bay, WI 54304
920-496-1065 – – fax 920-496-9111
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