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April 23, 2007
Late on Apr. 20, Senate Finance Committee Chair Max Baucus (D-MT) and House Ways and Means Committee Chair Charlie Rangel (D-NY) announced that they had reached agreement on a $4.84 billion package of small business tax incentives. Formally called the "Small Business and Work Opportunity Act," this business tax incentives package will be married with a bill to increase the minimum wage and then added to the Iraq Supplemental Bill (H.R. 1591) in conference. The first meeting of House and Senate conferees on the Supplemental Appropriations Bill was scheduled for Monday, Apr. 23.
Tax breaks in the small business tax package. The tax relief provisions in the small business tax package would:
- Extend the Work Opportunity Tax Credit (WOTC) for 3.5 years with liberalized rules for hiring disabled veterans and workers in "outward migration counties."
- Increase the Code Sec. 179 expensing limit to $125,000 and the investment-based expensing phaseout to $500,000, both effective for tax years beginning after 2006, and extend expensing for another year (through 2010).
- Include a number of GO Zone related relief provisions carried in the "Katrina Housing Tax Relief Act of 2007" passed by the House on Mar. 27 (e.g., extension and expansion of Low Income Housing Credit rules for buildings in the Go Zone).
- Allow employers to receive a full Tip Credit despite the federal minimum wage increase.
- Permit an unincorporated business owned jointly by a married couple to file as a sole proprietorship instead of as a partnership.
- Waive the Alternative Minimum Tax (AMT) limitations for the WOTC and the Tip Credit.
- Liberalize several S Corp rules, including eliminating stock or securities capital gains from the definition of passive investment income.
Proposed offsets. The agreement would pay for the above changes by:
- Raising the kiddie tax age from under-18 to under-19 (under-24 if a student).
- Modifying the rule that IRS must stop charging interest and filing related penalties if it fails to notify the taxpayer about a deficiency within 18 months after the taxpayer filed the return—the time limit would be extended to 36 months.
- Eliminating the requirement that IRS hold a collection due process hearing before issuing a levy on delinquent employment taxes.
- Expanding preparer penalties to all types of tax returns (e.g., employment, excise, exempt orgs., estate and gift tax) and increasing the penalty amounts.
- Creating a new penalty on claims for refund that are filed without any reasonable basis.
- Increasing the penalty for bad checks and money orders.
Expected fate of tax package. After the House and Senate pass the Supplementary Appropriations Bill, the President is expected to veto it. Republicans believe, once the President vetoes the bill, Democrats will have to sit down and compromise on a package that the President will sign. The compromise appropriations bill is expected to contain the federal minimum wage increase and the small business tax package.
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