The supplemental budget legislation signed into law on May 25 did more than just give the green light to funding for the ongoing war effort in the Middle East.

 There are a number of tax changes in the “Small Business and Work Opportunity Tax Act of 2007,” that are especially beneficial to small businesses. And, in addition to four pension-related technical corrections, there are also stricter rules added regarding the imposition of penalties for tax preparers.

Here’s an overview of some key provisions:

Small business tax relief -- The work opportunity tax credit is extended 44 months for qualified individuals who begin work for an employer after Dec. 31, 2007, and before Sept. 1, 2011. A number of modifications were also made to the WOTC. The qualified veterans’ targeted group is expanded, as is the definition of their qualified first-year wages. Another expansion involves the definition of high-risk youths to include otherwise qualifying individuals age 18, but not yet age 40 on the hiring date.AMT changes -- The act treats the tentative minimum tax as zero for determining the tax liability limitation for the work opportunity credit and the credit for taxes paid with respect to employee cash tips. Thus, these credits may offset the alternative minimum tax liability. The change applies to credits determined in taxable years beginning after Dec. 31, 2006.

Section 179 expensing -- The amounts for expensing by small businesses increases from $100,000 and $400,000, to $125,000 and $500,000, respectively, for taxable years beginning in 2007 through 2010. The act extends for one year the increased amount that a taxpayer may deduct and the other Section 179 rules applicable in taxable years beginning before 2010.

The act also simplifies the family business tax, makes some minor modifications to the Pension Protection Act of 2006, eliminates gains from sales or exchanges of stock or securities as an item of passive investment income, in some cases allows a bank which changes from the reserve method of accounting for bad debts to take into account all adjustments under Section 481 (along with other provisions specific to the taxation of S corporations), provides that the tip credit is determined based on a minimum wage of $5.15 per hour, and extends the increased expensing amount for property which is in one or more specified portions of the Gulf Opportunity Zone.Finally, the act contains a number of revenue generators, including among others:

  • An increase in the age of minor children whose unearned income is taxed as if it were the parents’ income (the so-called kiddie tax);
  • A broadening of the scope of the tax return preparer penalties to include preparers of estate and gift tax, employment tax, excise tax returns and exempt organizations returns, as well as altering the standards of conduct that must be met to avoid imposition of the penalties for preparing a return with respect to which there is an understatement of tax;
  • An increase of the corporate estimated tax payments due in July, August and September 2012, from 106.25 to 114.25 percent of the payment otherwise due;
  • The period before which accrual of interest and certain penalties are suspended is extended; and,
  • The statutory authorization for Internal Revenue Service user fees is permanently extended.

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