On May 25, President Bush signed a new Act that includes tax provisions that affect individuals and small businesses, including S Corporations. We will not cover everything that the Act affects but here are the most relevant portions affecting our clients:
Increase & Extension of Expensing for Small Business (Section 179 Expense)
Under Code Section 179, in lieu of depreciation, a taxpayer with a sufficiently small amount of annual investment may elect to deduct such costs currently. Prior to the Act the maximum amount a taxpayer could expense was $112,000 for tax years beginning in 2007 and was reduced for the amount by which the cost of qualifying property placed in service for the tax year exceeded $450,000. Under the Act, the new amounts for 2007 are increased to $125,000 and $500,000, respectively. These amounts are indexed for inflation in tax years beginning after 2007 and before 2011.
Increase in Age of Children Subject to the "Kiddie Tax"
A special "kiddie tax" applies to the net unearned income of certain children. Generally, the kiddie tax applies to a child if:
(1) the child has not reached a certain age by the close of the tax year and either of the child's parents is alive at such time; (2) the child's unearned income exceeds $1,700 (for 2007); and (3) the child does not file a joint tax return.
The kiddie tax applies regardless of whether the child may be claimed as a dependent by either or both parents.
Before the Act, the kiddie tax applied to children under 18. The Act expands the kiddie tax to apply to children who are 18 years old or who are full-time students over the age of 18 but under the age of 24.
Husband & Wife Business May be Treated as Sole Proprietorship
Before the Act, if a husband and wife intended to carry on a business together and share in the profits and losses, then they were considered to have formed a partnership.
Effective for tax years beginning after 2006, the Act liberalizes the rules relating to husband and wife businesses. It generally permits a qualified joint venture whose only members are a husband and wife filing a joint return not to be treated as a partnership for federal tax purposes.
For purposes of this provision, a qualified joint venture is a joint venture involving the conduct of a trade or business, if:
(1) the only members of the joint venture are a husband and wife; (2) both spouses materially participate in the trade or business; and (3) both spouses elect to have the provision apply.
Under the Act, a qualified joint venture conducted by a husband and wife who file a joint return is not treated as a partnership for federal tax purposes. All items of income, gain, loss, deduction and credit are divided between the spouses in accordance with their respective interests in the venture. Each spouse takes into account his or her respective share of these items as a sole proprietor. Under this provision, each spouse accounts for his or her respective share on the appropriate form, such as Schedule C.
This information is just a quick overview of the latest signed Act. If you would like further information please contact our office at 603-225-9400.
