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US Congressional Tax Writers Strike Deal On Small Business Tax Cuts

by Mike Godfrey,, Washington

24 April 2007

US Congressional tax writers have agreed on a package of small business tax incentives for inclusion in the supplemental spending bill currently in conference between the Senate and the House.

The package delivered to conferees on Friday by Max Baucus and Charles Rangel, chairmen of the Senate Finance Committee and the House Ways and Means Committee respectively, totals $4.84 billion in small business tax relief, fully offset.

The measures are included as part of the US Troops Readiness, Veterans’ Health, and Iraq Accountability Act of 2007, but are designed to mitigate the cost of a proposed increase in the federal minimum wage on small firms.

“It’s past time to get a pay increase on the ground for America’s minimum-wage workers. Chairman Rangel and I worked together to craft a targeted, fiscally responsible package of small business tax incentives that can help minimum wage legislation move through both chambers and into law,” said Baucus. “Small businesses employ many, many hardworking Americans, and many of them are preparing for the long-overdue increase in minimum wage that this Congress is finally set to pass. This agreement will provide meaningful tax relief to small businesses across America.”

Rangel added: "We have reached final resolution - and I mean final - on a package of small business tax credits that will enable us to pass the first increase in the Federal minimum wage in nearly a decade. This package provides common sense, responsible tax relief so our small businesses can continue to hire new workers and promote economic growth in our communities."

The tax relief provisions in the bill would:

  • Extend the Work Opportunity Tax Credit (WOTC) for 3 1/2 years with disabled veterans and outward migration provisions.
  • Increase the 179 expensing limit to $125,000 and the phase-out to $500,000 and extend through 2008 179 for Go Zone businesses.
  • Extend enhanced credit treatment for 2 additional years through 2010 and modify the carryover allocation and Federally subsidized rules for certain low income housing credit buildings.
  • Treat certain qualified GO Zone repairs or reconstruction as “qualified rehabilitation” for purposes of the mortgage revenue bond and Gulf Opportunity Zone bond rules, and call for GAO study of certain tax incentives in the GO Zone.
  • Allow employers to receive full tip credit despite increase in Federal minimum wage.
  • Allow an unincorporated business owned jointly by a married couple to file as a sole proprietorship instead of a partnership.
  • Allow WOTC and the tip credit to be taken under the Alternative Minimum Tax.
  • Bring about several changes to the S Corp rules, including ESBT provision.

The offset provisions would:

  • reduce the amount of credits taxpayers claim under the FICA/tip tax credit as a result of increase in the minimum wage.
  • raise the age from under-18 to under-19 (under-24 if a student) at which a child’s unearned income in excess of
    $1700 is taxed at the parent’s rate to discourage the practice of transferring investments to one’s child for the purpose of avoiding higher tax rates.
  • Modify the rule that the IRS must stop charging interest and filing related penalties if the IRS fails to notify the taxpayer about a deficiency within 18 months after the taxpayer filed the return – extended to 36 months.
  • Eliminate the requirement that the IRS hold a collection due process hearing before issuing a levy on delinquent employment taxes so these trust fund taxes are not allowed to pyramid. Taxpayers are still afforded CDP hearing once every two years.
  • Extend permanently IRS user fees.
  • Increase the bad check threshold to $1,250 from $750 and increase the bad check fee to $25 from $15.
  • Expand preparer penalties to all types of tax returns (e.g., employment, excise, exempt orgs., estate and gift tax) and increase the amount of the penalties.
  • Create a new penalty on claims for refund that are filed without any reasonable basis.

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