2. Tax Changes for Businesses
2007 Changes
Depreciation and Section 179 Deduction
Increased section 179 limits.
The maximum section 179 deduction you can elect for qualified section 179 property you placed in service in 2007 has increased to $125,000 ($160,000 for qualified enterprise zone property and qualified renewal community property). This limit is reduced by the amount by which the cost of section 179 property placed in service in the tax year exceeds $500,000. For qualified section 179 Gulf Opportunity (GO) Zone property, the maximum deduction is higher than the deduction for most other section 179 property. See chapter 2 of Publication 946, How to Depreciate Property.Depreciation limits on business vehicles.
The total depreciation deduction (including the section 179 deduction) you can take for a passenger automobile (that is not a truck or a van) you use in your business and first placed in service in 2007 is $3,060. The maximum deduction you can take for a truck or a van you use in your business and first placed in service in 2007 is $3,260. See Maximum Depreciation Deduction in chapter 5 of Publication 946. These limits are reduced if the business use of the vehicle is less than 100%.Limited applicability of the special depreciation allowance for Liberty Zone property.
The special depreciation allowances for qualified New York Liberty Zone property does not apply to most property placed in service after 2006. However, if you placed qualified nonresidential real property or qualified residential rental property in service during the tax year, you may still be able to claim the special depreciation allowance. See chapter 3 of Publication 946 and the 2007 Instructions for Form 4562.Self-Employment Tax
The maximum amount of net earnings subject to the social security part of the self-employment tax for tax years beginning in 2007 is $97,500. All net earnings of at least $400 are subject to the Medicare part of the tax.
Social Security and Medicare Taxes
The maximum amount of wages subject to the social security tax for 2007 is $97,500. There is no limit on the amount of wages subject to the Medicare tax.
Husband-Wife Business
Generally, if you and your spouse jointly own and operate an unincorporated business and share in the profits and losses, you are partners in a partnership and you must file Form 1065, U.S. Return of Partnership Income.
Exception—Qualified joint venture.
Beginning in 2007, if you and your spouse each materially participate as the only members of a jointly owned and operated business, and you file a joint return for the tax year, you can make an election to be treated as a qualified joint venture instead of a partnership. By making the election, you will not be required to file Form 1065 for any year the election is in effect and will instead report the income and deductions directly on your joint return. If you and your spouse filed a Form 1065 for the year prior to the election, the partnership terminates at the end of the tax year immediately preceding the year the election takes effect.Note.
Mere joint ownership of property that is not a trade or business does not qualify for the election.
Making the election.
To make this election, you must divide all items of income, gain, loss, deduction, and credit attributable to the business between you and your spouse in accordance with your respective interests in the venture. Each of you must file a separate Schedule C, C-EZ, or F. On each line of your separate Schedule C, C-EZ, or F, you must enter your share of the applicable income, deduction, or loss. Each of you must also file a separate Schedule SE to pay self-employment tax, as applicable. If you have employees or otherwise need an employer identification number (EIN) for the business, please see www.irs.gov, keyword “qualified joint venture,” for more information. If you and your spouse make the election for your rental real estate business, you must each report your share of income and deductions on Schedule C or C-EZ instead of Schedule E. Rental real estate income generally is not included in net earnings from self-employment subject to self-employment tax and generally is subject to the passive loss limitation rules. Electing qualified joint venture status and using the Schedule C or C-EZ does not alter the application of the self-employment tax or the passive loss limitation rules. For a rental real estate business not subject to self-employment tax, enter “Exempt-QJV” on Form 1040, line 58, and do not file Schedule SE, unless you had other income subject to self-employment tax. If you had other net earnings from self-employment of $400 or more, enter “Exempt-QJV” and the amount of your net profit from the rental real estate business from Schedule C or C-EZ on the dotted line to the left of Schedule SE, line 3. Subtract that amount from the total of lines 1 and 2 and enter the result on line 3. Use the amount on line 3 to calculate your self-employment tax that will be reported on Form 1040, line 58. Do not enter “Exempt-QJV” on Form 1040, line 58. Once made, the election can only be revoked with the permission of the IRS. However, the election technically remains in effect only for as long as the spouses filing as a qualified joint venture continue to meet the requirements for filing the election. If the spouses fail to meet the qualified joint venture requirements for a year, a new election will be necessary for any future year in which the spouses meet the requirements to be treated as a qualified joint venture.Self-Employed Health Insurance Deduction
Partners and more-than-2% shareholders in an S corporation may be able to claim this deduction when the insurance policy is in the name of the partner or shareholder. You can either pay the premiums yourself or the partnership or S corporation can pay them. However, if you pay the premiums yourself, you must be reimbursed by the partnership or S corporation to claim the deduction. For more information, see chapter 6 of Publication 535, Business Expenses.
Domestic Production Activities Deduction Increased
For tax years beginning in 2007, 2008, or 2009, the percentage used to figure the domestic production activities deduction increases to 6%. For more information on this deduction, see Form 8903, Domestic Production Activities Deduction, and its instructions.
Employer-Owned Life Insurance Contracts
Generally, a policyholder owning one or more employer-owned life insurance contracts issued after August 17, 2006, is required to file a report for each tax year the contract(s) is owned. However, you are not required to file a report for any tax year ending before November 14, 2007. For more information, see Form 8925, Report of Employer-Owned Life Insurance Contracts.
Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips
For tips received for services performed after 2006, the amount of tips for any month that is used to figure the credit must be reduced by the amount by which the wages that would have been payable during that month at $5.15 an hour exceed the wages (excluding tips) paid by the employer during that month.
For tax years beginning after 2006, the credit is allowed against both the regular tax and the AMT.
Work Opportunity Credit
The work opportunity credit has been extended to cover members of targeted groups who begin work for you before September 1, 2011. For tax years beginning after 2006, the credit is allowed against both the regular tax and the AMT. For more information about this credit, see Form 5884, Work Opportunity Credit.
Members of targeted groups.
For employees who begin work for you after 2006:Long-term family assistance recipients are members of a targeted group (if hired before 2007, see Form 8861, Welfare-to-Work Credit).
Ex-felons are no longer required to be a member of a low-income family.
Food stamp recipients must be at least age 18 when hired, but not age 40 or older.
The qualified veterans group is expanded to include veterans entitled to compensation for a service-connected disability and who, during the one-year period ending on the hiring date, were (a) discharged or released from active duty in the U.S. Armed Forces or (b) unemployed for a period or periods totaling at least 6 months. The first-year wages taken into account for these disabled veterans is $12,000.
The high-risk youth group has been renamed “designated community residents” and the age requirement has been changed to include individuals who are at least age 18 but not yet age 40. In addition, residents of rural renewal counties who meet this age requirement have been added to this group.
Alternative Fuel Vehicle Refueling Property Credit
For refueling property placed in service after 2005, the $30,000 and $1,000 credit limitations apply to each location at which property is placed in service. Also, the definition of alternative fuel is revised. For more information, see Form 8911, Alternative Fuel Vehicle Refueling Property Credit.
Low Sulfur Diesel Fuel Production Credit
Additional guidance is available on obtaining the required certification of qualified costs. Also, for tax years ending after 2002, the adjustment required when you deduct qualified costs and also claim the low sulfur diesel fuel production credit is clarified. For more information, see Form 8896, Low Sulfur Diesel Fuel Production Credit.
Fringe Benefit Parking Exclusion and Commuter Transportation Benefit
You can generally exclude a limited amount of the value of qualified parking and commuter highway vehicle transportation and transit passes you provide to an employee from the employee's wages subject to employment taxes. For 2007, the monthly exclusion for qualified parking increases to $215 and the monthly exclusion for commuter highway vehicle transportation and transit passes increases to $110. See Qualified Transportation Benefits on page 17 of Publication 15-B, Employer's Tax Guide to Fringe Benefits (For Benefits Provided in 2007).
Health Savings Accounts
Eligibility.
For 2007, a qualifying high deductible health plan (HDHP) must have a deductible of at least $1,100 for self-only coverage or $2,200 for family coverage and must limit annual out-of-pocket expenses of the beneficiary to $5,500 for self-only coverage and $11,000 for family coverage.Employer contributions.
Up to specified dollar limits, you can generally exclude your contributions (must be in cash) to the health savings account (HSA) of a qualified individual (determined monthly) from federal income tax withholding, social security tax, Medicare tax, and FUTA tax. For 2007, you can contribute up to the following amounts to a qualified individual's HSA.$2,850 for self-only coverage or $5,650 for family coverage.
$3,650 for self-only coverage or $6,450 for family coverage for qualified individuals who are age 55 or older at any time during the year.
S Corporations
The following changes affect S corporations.
The capital gain of an S corporation is not treated as passive investment income. This applies to tax years beginning after May 25, 2007. For details, see Internal Revenue Code section 1362(d)(3).
Generally, restricted bank director stock is not taken into account as outstanding stock of an S corporation. This applies to tax years beginning after 2006. For details, see Internal Revenue Code section 1361(f).
A special rule applies to banks required to change from the reserve method of accounting on becoming an S corporation. This applies to tax years beginning after 2006. For details, see Internal Revenue Code section 1361(g).
If a qualified subchapter S subsidiary no longer qualifies because of a sale of its stock, new rules apply as to how such a sale is treated. This applies to tax years beginning after 2006. For details, see Internal Revenue Code section 1361(b)(3)(C).
Certain S corporations may be able to eliminate all earnings and profits attributable to tax years beginning before 1983. See Public Law 110-28, section 8235.
An electing small business trust may be able to deduct interest expense on indebtedness it incurred to acquire stock in an S corporation. This applies to tax years beginning after 2006. For details, see Internal Revenue Code section 641(c)(2).
For tax years ending on or after December 31, 2007, certain corporations with reasonable cause for not timely filing Form 2553, Election by a Small Business Corporation, can request to have the form treated as timely filed by filing it as an attachment to Form 1120S, U.S. Income Tax Return for an S Corporation. For more information, see Form 2553 and its instructions.
Penalty for Late Filing of a Partnership Return
For returns required to be filed after December 20, 2007, the late filing penalty is increased to $85 for each month or part of a month (up to 12 months) the return is late or does not contain the required information, multiplied by the total number of persons who were partners in the partnership during any part of the partnership's tax year for which the return is due. For more information, see the Instructions for Form 1065 or the Instructions for Form 1065-B, U.S. Return of Income for Electing Large Partnerships.
Penalty for Late Filing of an S Corporation Return
For returns required to be filed after December 20, 2007, a new penalty may be charged if the return is filed after the due date (including extensions) or the return does not show all required information. The penalty is $85 for each month or part of a month (up to 12 months) the return is late or does not contain the required information, multiplied by the total number of persons who were shareholders in the corporation during any part of the corporation's tax year for which the return is due. For more information, see the Instructions for Form 1120S.
Certain Transfers of Qualifying Geothermal or Mineral Interests
A 25% exclusion from gross income is allowed for long-term capital gain from certain conservation sales of qualifying mineral and geothermal interests located on eligible federal land. The sale must be to an eligible entity and occur after December 19, 2006. An excise tax may be imposed if an eligible entity fails to take steps consistent with the protection of conservation purposes.
For details, including the geographical location of eligible federal land, see section 403 of Title IV, Division C, of the Tax Relief and Health Care Act of 2006. Also see Form 8924, Excise Tax on Certain Transfers of Qualifying Geothermal or Mineral Interests, when it is released.
Certain Timber Losses
In determining your net operating loss (NOL), you can no longer treat income and expenses attributable to qualified timber property located in the GO Zone, Rita GO Zone, or Wilma GO Zone as attributable to a farming business for 2007 or later years.
See When To Use an NOL in Publication 536, Net Operating Losses (NOL) for Individuals, Estates, and Trusts.
2008 Changes
Depreciation and Section 179 Deduction
Increased section 179 limits.
The maximum section 179 deduction you can elect for qualified section 179 property you placed in service in tax years that begin in 2008, has increased to $250,000 ($285,000 for qualified enterprise zone property and qualified renewal community property). This limit is reduced by the amount by which the cost of section 179 property placed in service in the tax year exceeds $800,000. For qualified section 179 Gulf Opportunity (GO) Zone property placed in service in certain counties and parishes of the GO Zone, the maximum deduction is higher than the deduction for most other section 179 property.Depreciation limits on business vehicles.
The total depreciation deduction (including the section 179 deduction) you can take for a passenger automobile (that is not a truck or a van) you use in your business and first placed in service in 2008 is $2,960 ($10,960 for automobiles for which the special depreciation allowances applies). The maximum deduction you can take for a truck or a van you use in your business and first placed in service in 2008 is $3,160 ($11,160 for trucks or vans for which the special depreciation allowance applies). These limits are reduced if the business use of the vehicle is less than 100%.Special depreciation allowance for certain property.
You may be able to take an additional first year special depreciation allowance for certain qualified property (defined below). The allowance is an additional deduction of 50% of the property's depreciable basis (after any section 179 deduction and before figuring your regular depreciation deduction). Property that qualifies for this special depreciation allowance includes the following.Tangible property depreciated under the modified accelerated cost recovery system (MACRS) with a recovery period of 20 years or less.
Water utility property.
Off-the-shelf computer software.
Qualified leasehold improvement property.
You must have acquired qualified property by purchase after 2007 and before 2009. If a binding contract to acquire the property existed before 2008, the property does not qualify.
Qualified property must be placed in service after 2007 and before 2009 (before 2010 for certain transportation property and certain property with a long production period).
The original use of the property must begin with you after 2007.
Property placed in service and disposed of in the same tax year.
Property converted from business use to personal use in the same tax year it is acquired. Property converted from personal use to business use in the same or later tax year may be qualified GO Zone property.
Property required to be depreciated under the alternative depreciation system (ADS).
Property included in a class of property for which you elected not to claim the special depreciation allowance.
Self-Employment Tax
The maximum amount of net earnings subject to the social security part of the self-employment tax for tax years beginning in 2008 is $102,000. All net earnings of at least $400 are subject to the Medicare part of the tax.
Social Security and Medicare Taxes
The maximum amount of wages subject to the social security tax for 2008 is $102,000. There is no limit on the amount of wages subject to the Medicare tax.
Federal Unemployment Tax Act (FUTA) Tax Rate
The 6.2% FUTA tax rate has been extended through calendar year 2008. It was scheduled to decrease to 6.0% after 2007.
Maximum Automobile Value for Using the Cents-Per-Mile Valuation Rule
For 2008, an employer providing a passenger automobile for the first time for the personal use by an employee may determine the value of the personal use by using the vehicle cents-per-mile value rule if the vehicle's fair market value on the date it is first made available to the employee does not exceed $15,000 for a passenger automobile other than a truck or van, or $15,900 for a truck or van. For more information, see Cents-Per-Mile Rule on page 20 of Publication 15-B, Employer's Tax Guide to Fringe Benefits.
Fringe Benefit Parking Exclusion and Commuter Transportation Benefit
You can generally exclude a limited amount of the value of qualified parking and commuter highway vehicle transportation and transit passes you provide to an employee from the employee's wages. For 2008, the monthly exclusion for qualified parking increases to $220 and the monthly exclusion for commuter highway vehicle transportation and transit passes increases to $115. See Qualified Transportation Benefits on page 17 of Publication 15-B.
Health Savings Accounts
Eligibility.
For 2008, a qualifying high deductible health plan (HDHP) must have a deductible of at least $1,100 for self-only coverage or $2,200 for family coverage and must limit annual out-of-pocket expenses of the beneficiary to $5,600 for self-only coverage and $11,200 for family coverage.Employer contributions.
Up to specified dollar limits, you can generally exclude your contributions (must be in cash) to the health savings account (HSA) of a qualified individual (determined monthly) from federal income tax withholding, social security tax, Medicare tax, and FUTA tax. For 2008, you can contribute up to the following amounts to a qualified individual's HSA.$2,900 for self-only coverage or $5,800 for family coverage.
$3,800 for self-only coverage or $6,700 for family coverage for qualified individuals who are age 55 or older at any time during the year.
Nonqualified Deferred Compensation Plans
Generally, all amounts deferred under a nonqualified deferred compensation plan for the tax year and all preceding tax years are included in your employees' wages in the current year, unless the plan meets certain requirements. These requirements were stated in Notice 2005-1. However, portions of that notice were obsoleted and replaced by final regulations that were effective for tax years beginning after 2007. For more information, see Nonqualified deferred compensation plans under Employee Compensation in Publication 525, Taxable and Nontaxable Income.
Penalty for Late Filing of a Partnership Return
For returns required to be filed for tax years beginning in 2008, the penalty is increased to $86 for each month or part of a month (up to 12 months) the return is late or does not contain the required information, multiplied by the total number of persons who were partners in the partnership during any part of the partnership's tax year for which the return is due.
Expired Tax Benefits
In addition to certain provisions discussed earlier, the following tax benefits expired as shown below.
Credit for increasing research activities (research credit) (for amounts paid or incurred after 2007).
Indian employment credit (for tax years beginning after 2007).
Railroad track maintenance credit (for tax years beginning after 2007).
Eligibility of certain biomass and synthetic fuels produced at certain qualified facilities for the nonconventional source fuel credit (for sales after 2007).
Energy efficient appliance credit (for appliances produced after 2007).
Shorter recovery periods for qualified Indian reservation property (for property placed in service after 2007).
Fifteen-year property classification for qualified leasehold improvement and restaurant property (for property placed in service after 2007).
Seven-year property classification for qualified motorsports entertainment complex (for property placed in service after 2007).
Suspension of the 100% taxable income limit on percentage depletion for oil and natural gas from marginal properties (for tax years beginning after 2007).
Special rules for contributions of food and book inventories (for contributions made after 2007).
Deduction for corporate contributions of computer technology or equipment for educational purposes (for contributions made in tax years beginning after 2007).
Environmental cleanup (remediation) costs deduction (for costs paid or incurred after 2007).
Reforestation expense deduction increase for certain small timber producers (for expenses paid or incurred after 2007).
Shareholder basis adjustment for stock of S corporations making charitable contributions of property (for tax years beginning after 2007).
Certain tax incentives based on the designation of the District of Columbia Enterprise Zone (for any period after 2007).
American Samoa economic development credit (for tax years beginning after 2007).
Deduction for domestic production activities in Puerto Rico (for tax years beginning after 2007).
