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Saturday, May 26, 2007

TAX PROVISIONS HIDDEN IN MINIMUM WAGE LEGISLATION

In passing an increase in the federal minimum wage, Congress also enacted some new tax law provisions. The Small Business and Work Opportunity Tax Act of 2007 includes provisions on the following subjects:

  • An expansion of the kiddie tax rules to apply to children age 18, and children over age 18 but under age 24 who are full-time students—if their earned income doesn't exceed one-half of the amount of their support. The kiddie tax can result in such children being taxed at the effective tax rate of their parents on their unearned income.
  • Expensing under Section 179 is increased from a maximum of $100,000 to $125,000.
  • Significantly increases the penalties on tax return preparers if the return contains an "unreasonable position" or "willful or reckless conduct."
  • A qualified joint venture conducting a trade or business that is owned solely by a husband and a wife in which they both materially participate can avoid partnership classification and instead be effectively treated as a disregarded entity.
  • Interest expense that is paid or accrued on debt incurred to acquire S corporation stock is taken into account in determining the income of the S portion of an Electing Small Business Trust (ESBT) under Subchapter S. Thus, the deduction for interest on the debt incurred to acquire the S stock is taken into account in determining the taxable income of the S portion of the ESBT.

A modification to the qualified Subchapter S subsidiary rules that limits the gain that the S corporation shareholders take into account on sales of more than 20% interests in QSubs to the gain on the percentage sold, rather than the gain on 100% of the QSub stock.

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