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179 expensing Section 179 of the tax code allows eligible businesses to write off (expense) their asset purchases immediately rather than depreciate the assets over time. For tax years beginning in 2007, the limitation on Section 179 expensing is increased from $112,000 to $125,000. This change will be helpful to businesses that have purchased or intend to purchase equipment and other business-related assets (other than real estate) in 2007. The deduction is phased out dollar-for-dollar as purchases rise from $500,000 to $625,000. Joint ventures by spouses Starting with the 2007 tax year, a married couple who files a joint return and co-owns an unincorporated business may elect not to treat the joint venture as a partnership for tax purposes. S corporations Among other changes, the new law alters the definition of “passive investment income” to exclude capital gains from the sale or exchange of stock. This is a helpful change, since an S corporation that has accumulated earnings and profits from years when it operated as a regular C corporation risks losing its S corporation status if it has too much passive investment income. FICA tip credit Food and beverage establishments may claim a tax credit for employer FICA (Social Security and Medicare) taxes paid on tips in excess of amounts treated as wages for purposes of satisfying federal minimum wage requirements. The new law freezes the minimum wage used in computing the tip credit at $5.15 an hour. As the actual federal minimum wage rises, this change will allow employers to retain the same benefit from the tip credit. Work Opportunity Tax Credit (WOTC) Employers who hire disadvantaged workers belonging to certain targeted groups may claim a tax credit for a portion of their wage expense. The new law modifies the WOTC and extends it through August 31, 2011, for most targeted groups. The changes are effective for individuals who begin work for the employer after May 25, 2007. Kiddie tax By transferring income-producing assets to their children, parents in high tax brackets can often reduce the taxes payable on the income. The kiddie tax rules restrict such intra-family income shifting by taxing a child’s unearned income in excess of $1,700 (in 2007) at the child’s parents’ presumably higher rate. After a child reaches age 18 (it used to be 14), the kiddie tax no longer applies. Effective for tax years beginning after May 25, 2007 (starting in 2008 for most taxpayers), the kiddie tax will also apply to older children — 18-year-olds and full-time students ages 19 through 23 — who don’t have earned income exceeding half of their support. |
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