On May 25, 2007, President Bush signed into law H.R. 2206, the Small Business and Work Opportunity Act of 2007. This act includes a federal minimum wage increase and the Small Business and Work Opportunity Tax Act of 2007.

The tax portion of the bill provides a number of incentives for small businesses to help ease the burden of the minimum wage increase. Some provisions affect various types of small businesses, while others are specific to individuals or S corporations. Some of the provisions included in the act are summarized below:

Work Opportunity Tax Credit (WOTC)

• The WOTC is a credit provided to employers who hire people in certain targeted groups (ex-felons, high-risk youth, summer youth employees, etc.).
• The Act extends the WOTC for 3 ½ years through September 30, 2011.
• It expands the criteria of employees qualifying for the WOTC: Disabled veterans are included and the potential credit related to them is doubled. Residents of certain areas suffering significant population losses may now qualify for the credit and the definition of "high-risk youth" is expanded to include employees up to the age of 39.

§179 Expensing

• Expanded expensing was to expire after 2009 and revert to a maximum annual deduction of $25,000. The Act extends the expanded benefit through 2010 and increases the maximum annual deduction from $112,000 to $125,000.
• The amount of annual cost additions that trigger a phase-out of the §179 deduction has been increased from $450,000 to $500,000.
• Qualification of "off-the-shelf" software is extended by one year through 2010.

Tip Credit

• Due to the mechanics of the tip credit calculations, a minimum wage increase will reduce the benefits afforded by the tip credit. To prevent such a reduction, the Act "freezes" the minimum wage solely for purposes of these calculations, thereby allowing restaurant employers to retain full benefit of the credit despite the true increase to the minimum wage.

S Corporations

• Several favorable changes to S corporation rules include excluding capital gains from the definition of "passive investment income" and allowing electing small business trusts to deduct interest expenses related to purchasing S corporation stock.

Expansion of Taxpayers Subject to "Kiddie Tax"

• Generally, "kiddie tax" rules cause certain investment income of minor children to be taxed at their parent's higher tax rates, and it applied to children up to age 17.
• The Act increases the age to 18, and up to 23 if the child is a full-time student.

The information above is intended to be a brief summary of certain portions of the Act and is not intended to be thorough or construed as tax, legal or financial advice. For more information, please contact a Baker Newman Noyes tax professional at 800-244-7444.