The Small Business and Work Opportunity Tax of 2007 Has Passed.  How Will It Affect You?
by Kurt Beck
Auto Dealer Alert, 2007 Volume 6

Webster’s dictionary defines “gridlock” as “congestion, or lack of movement.” When most of us think of gridlock, we think of the Detroit area “Mixing Bowl,” the “Dan Ryan” expressway in Chicago, and perhaps the U.S. Congress’s inability to agree on much of anything. However, based on having passed six new major tax acts in the last five years, it doesn’t appear gridlock has slowed down Washington’s prowess with changing our tax laws.

The latest major act, signed by President Bush on May 25, 2007, is called the Small Business and Work Opportunity Tax Act of 2007 (SBWOTA). As with most tax legislation, there are winners and losers. The goal of this article is to highlight these changes and what you can do to take advantage of them.

Businesses

Once again, the amount of the Section 179 election to expense property in the year of purchase has been increased. For years beginning after 2006, the amount has been increased from $112,000 to $125,000 and will be indexed for inflation for years 2008 through 2010. This expense deduction begins to phase out if more than $500,000 of eligible property is placed in service during the year, up from the previous limit of $400,000.

This election relates primarily to “tangible personal property” purchases, so proper planning would include the timing of property purchases between years to maximize the $125,000 allowance each year, as well as to make sure total expenditures for property do not exceed $500,000 in any given year.

The Work Opportunity Tax Credit, which was set to expire on December 31, 2007, has been extended until August 31, 2011. In addition to the extension of time, the new law also expanded the list of targeted individuals eligible for the credit to include disabled veterans and individuals in counties that have suffered significant population losses. This credit, a dollar for dollar reduction in income taxes, is available to businesses that hire employees from the new above mentioned groups and from the previously targeted groups that include veterans, ex-felons, high-risk youth, and food stamp and supplemental security income recipients.

Although this tax credit has been around for many years, it seems to have become an easy one for many dealers to miss.  The amount of the credit is 40 percent of the first $6,000 paid to each eligible worker, resulting in an immediate tax savings of $2,400 for each eligible worker employed. Given the variety of skills and types of workers needed in a typical dealership, this credit seems to be a natural fit for most dealerships.

Individuals

For the second time in recent years, the “kiddie tax” age limit has been increased. Prior to 2006, children under the age of 14 as of the end of the year were subject to this tax provision, which basically taxes unearned income greater than $1,700 at their parent’s highest marginal tax rate.

In 2006, the age limit was increased to children under age 18, and effective for years beginning after May 25, 2007, SBWOTA raises the age limit again to (1) under age 19 as of the end of the year, or (2) under age 24 as of the end of the year and a full-time student for at least five months of the taxable year. However, children in one of these two new categories are exempt from the tax if their earned income exceeds one-half of the amount needed for their support.

This change in the kiddie tax creates major changes in what has traditionally been a popular tax and estate planning technique utilized by many dealers, and these recent age increases will make it much more difficult to continue utilizing this type of planning. We recommend owners consult with their tax advisor to determine the impact on your specific situation.

Other Provisions

There are a number of additional tax provisions contained in SBWOTA, including the waiving of the Alternative Minimum Tax (AMT) limits on the use of certain credits, the easing of some S Corporation tax provisions related to qualified S Corporation subsidiaries and those with passive income that were former C corporations, and an increase in the standards for avoiding preparer penalties, as well as the penalty amounts.

As always, an ounce of prevention is worth a pound of cure when it comes to your business and individual tax situation. And for those who buy into the gridlock story, take solace; there’s at least one area legislators never seem to stop thinking about and changing — your taxes!