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December 14, 2007 • Part 1 of 2
Tax Updates 2007
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Dear Subscriber,
Congress is now controlled by the Democrats. Thus far, no major changes but some changes may occur with AMT and possibly capital gains. Let’s hold our breathe and wait and see for these changes.
Please call me, if you have any tax planning questions or concerns to consider before the year end at 323-934-2462.
Regards,
Peter Soh,CPA
peter@adviseinc.com
www.adviseinc.com
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The IRS briefly highlights these initial key changes:
Self-employment tax
The maximum amount of self-employment income subject to Social Security taxes increases to $97,500 in 2007, up from $94,200 in 2006. The self-employment tax rate remains 15.3% on earnings to the Social Security maximum and 2.9% after the maximum.
Social Security tax
The maximum amount of wages subject to Social Security tax increases to $97,500 in 2007, up from $94,200 in 2006. The tax rate remains 7.65% on employers and employees.
Business standard mileage rate
The standard business mileage rate increases to 48.5 cents per mile for miles driven in 2007 for business, up from 44.5 cents per mile in 2006. (You can deduct the cost of parking and tolls in addition to the mileage allowance.)
Tax-free parking for employees
Starting in 2007, firms can pay for $215 a month of parking tax free for employees, up $10 per month from 2006. The cap on tax-free transit passes rises to $110 a month, up $5 a month from 2006.
Section 179 Expense Deduction
The maximum amount of qualifying property placed in service in 2007 that businesses can expense increases to $125,000, a $17,000 uptick from 2006. The annual investment limit increases to $500,000 for 2007, up from $430,000 the year before. Thus, you won't lose the benefit of expensing until you place more than $500,000 of fixed assets in service in 2007. The large increase is due in part to the Small Business and Work Opportunity Tax Act of 2007, which President Bush signed into law on May 25, 2007. According to tax service provider’s CCH’s Small Business and Work Opportunity Tax Act of 2007 Special Report, under the new law, the base $100,000 limit ($112,000 as indexed for inflation for 2007) is increased to $125,000 for tax years beginning in 2007 through 2010. In addition, the investment limitation is raised to $500,000 for tax years beginning in 2007 through 2010. The $500,000 amount is indexed for inflation in tax years beginning after 2007 and before 2011.
Additional impacts of the act based on the CCH report
The act extended the Work Opportunity Tax Credit (WOTC) through August 31, 2011. It had been set to expire for employees hired after December 31, 2007. The new law also broadens the scope of the credit. The expanded WOTC was effective as of May 26, 2007.
It also includes a package of S Corp reforms. The changes affect the treatment of passive investment income, partial sale of qualified subchapter S subsidiaries (QSubs), interest deduction by electing small business trusts (ESBT), reduction of earnings and profits (E&P) and banks operating as S Corps.
Domestic Production Activities Deduction
Beginning in 2007, this deduction increases to 6% of qualifying business net income from domestic production activities, up from 3% in 2006. This deduction applies to businesses engaged in construction, engineering or architectural services; film production; or the lease, rental or sale of equipment manufactured in the U.S.
Hybrid cars
The IRS site notes that the Energy Policy Act of 2005 replaced the clean-fuel burning deduction with a tax credit. A tax credit is subtracted directly from the total amount of federal tax owed. The tax credit for hybrid vehicles applies to vehicles purchased or placed in service on or after January 1, 2006. To learn more about which autos qualify and the tax credit associated with each, see the IRS’s “Hybrid Cars and Alternative Motor Vehicles.”
Help with health care
Inc. magazine’s “New Tax Breaks for 2007” article outlines the way in which the Tax Relief and Health Care Act of 2006 made it easier to help employees cover medical coverage through Health Savings Accounts (HSAs). If you pay for a high-deductible (low-cost) health plan, tax-deductible contributions can be made to HSAs to pay medical costs not covered by insurance. Income earned in these accounts then builds up on a tax-deferred basis. Withdrawals to pay medical costs not covered by insurance are tax-free, but unused funds can be withdrawn at any time for any purpose; they are taxed and there is a 10% penalty for withdrawals for non-medical purposes before age 65. For 2007, the annual deduction is up to $2,850 for self-only coverage, or $5,650 for family coverage. The contribution is no longer limited to the policy’s deductible and the contribution need not be pro-rated for those who become eligible for HSAs during the year. Under the new legislation, employees can fund HSAs through a one-time transfer from an IRA, a flexible-spending account or a health reimbursement account; no deduction can be claimed for these funding options.
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