Small Business Work Opportunity Act of 2007 (H.R. 2206)

• Having served on active duty in the U.S. Armed Forces for more than 180 days or having been discharged or released from active duty for a service-connected disability.

• If the individual served a period of active duty of more than 90 days, none of that more-than-90-day period was within 60-days of the hiring date.

• Was certified by the designated local agency as being a member of a family receiving assistance under a food stamp program for a 3-month period ending during the 12-month period ending on the hiring date.

The new law adds a compensation-for-disability requirement that the individual is entitled to compensation for a service-connected disability and is hired within one year of being discharged from active duty. The individual must also have aggregate periods of unemployment during that one-year period that equals or exceeds six months.

The amount of qualified first-year wages that can be taken into account in determining the WOTC with respect to a qualified veteran is increased to $12,000. Effective for individuals who begin work for the employer after May 25, 2007.

FICA tip credit The FICA tip credit is determined based on a minimum wage of $5.15 per hour. If the amount of the minimum wage increases, (as it has under this Act to $7.25/hour), the amount of the FICA tip credit will not be reduced. This means that the FICA tip credit won't be affected by the current or any future minimum wage increases. Effective for tips received for services performed after December 31, 2006.

WOTC and the FICA tip credit can offset the taxpayer's AMT liability. Effective for WOTCs and FICA tip credits determined in tax years beginning after December 31, 2006 and to carrybacks of those credits.

Corporate estimated tax Corporate estimated tax payments due in July, August, and September 2012 increase from 106.25 percent to 114.25 percent of the payment otherwise due. These percentages apply to corporations with assets of at least $1 billion. Effective May 25, 2007.

Levies The rules under Sec. 6330(f)(3) requiring notice and an opportunity for a hearing before a levy don't apply to “disqualified employment tax levies.” However, the taxpayer must be given the opportunity for a post-levy collection due process (CDP) hearing within a reasonable time period after the levy.

A disqualified employment tax levy is any levy to collect employment taxes (federal income tax withholding, FICA, FUTA, or RRTA) for any tax period if the person subject to the levy (or a predecessor) requested a hearing under Sec. 6330 for unpaid employment taxes arising in the most recent two-year period before the beginning of the tax period for which the levy is served. Effective for levies issued on or after September 22, 2007.

Preparer penalties A tax return preparer who prepares a return or refund claim for which any part of a tax liability understatement is due to an “unreasonable position” must pay a penalty for each return or claim equal to the greater of:

• $1,000, or

• 50 percent of the income earned (whether or not collected) by the tax return preparer for preparing the return or claim. A tax return preparer who prepares a return or refund claim for which any part of a tax liability understatement is due to “willful or reckless conduct” must pay a penalty for each return or claim equal to the

greater of:

• $5,000, or

• 50 percent of the income earned (whether or not collected) by the tax return preparer for preparing the return or claim.

This provision amends the definition of tax return preparer to include preparers of estate, gift, employment and excise tax returns, and exempt organization returns. Effective for returns prepared after May 25, 2007.

Erroneous refund claim A person making a claim for refund or credit for income tax (other than a claim for refund or credit relating to the earned income credit) for an excess amount will be subject to a new penalty equal to 20 percent of the excess amount.

An “excessive amount” is the amount by which the amount claimed for any tax year exceeds the amount allowable under the Code for that tax year. Effective for any claim filed or submitted after May 25, 2007.

Bad checks For checks or money orders used to pay any amount due under the Code and that are less than $1,250, the minimum penalty increases to $25 or the amount of the check or money order, whichever is less.

Effective for checks or money orders received after May 25, 2007.

Under prior law, the IRS had to suspend the imposition of interest and penalties if they failed to provide a notice to the taxpayer specifically stating the taxpayer's liability and the reason for the liability within 18 months beginning on the later of (a) the date the return was filed, or (b) the due date of the return (without regard to extensions).

The IRS is now given 36 months to notify taxpayers of their liability and the reason for the liability, while interest and penalties accrue.

Effective for notices provided after November 25, 2007.

IRS user fees made permanent The IRS user fee program for issuing letter rulings, determination letters, information letters, and other responses to taxpayers' questions concerning their tax status, or the tax status of a particular transaction was set to expire for rulings issued after September 30, 2014.

The user fee program is now permanent. Effective for requests made after May 25, 2007.

Husband and wife joint ventures If a qualified joint venture is conducted by a husband and wife who file a joint return for the tax year, the joint venture is not treated as a partnership for tax purposes.

All items of income, gain, loss, deduction, and credit are divided between the spouses according to their respective interests in the venture and each spouse takes into account his or her respective share of these items as if they were attributable to a trade or business conducted by the spouse as a sole proprietor. Each spouse will report his or her shares on the appropriate form, such as Schedule C, E, or F.

A qualified joint venture means any joint venture involving the conduct of a trade or business if:

• The only members of the joint venture are a husband and wife.

• Both spouses materially participate in the trade or business under the passive loss rules without regard to the rule that treats participation by one spouse as participation by the other.

• Both spouses elect the application of this rule.

Effective for tax years beginning after December 31, 2006.

Interest on debt to acquire stock Interest expense that is paid or accrued on debt incurred to acquire S corporation stock is taken into account in determining the income of the S portion of an electing small business trust (ESBT). Effective for tax years beginning after December 31, 2006.

Sale of interest in QSub An S corporation can own 100 percent of qualified Subchapter S subsidiaries (QSubs). QSubs are treated as part of the S corporation, rather than as separate entities.

If the S corporation fails the 100 percent ownership of the QSub because of a sale of the QSub stock, the sale of the stock will be treated as if the sale were:

• A sale of an undivided interest in the assets of the QSub (based on a percentage of the stock sold).

• Followed by an acquisition of all of its assets (and the assumption of all of its liabilities) in a Sec. 351 transaction.

Effective for tax years beginning after December 31, 2006.

If an S corporation has earnings and profits from C corporation years, it is subject to a corporate level tax on its net passive income if more than 25 percent of its gross receipts is passive investment income.

Under the new law, passive investment income means gross receipts derived from royalties, rents, dividends, interest, and annuities. Gains on sales of stock and securities are no longer passive investment income.

Effective for tax years beginning after May 25, 2007.

Pre-1983 earnings and profits A corporation that was an S corporation for any tax year beginning before January 1, 1983 and was not an S corporation for its first tax year beginning after December 31, 1996 must reduce its accumulated earnings and profits (E&P) (for the first tax year beginning after May 25, 2007) by an amount equal to the portion (if any) of the accumulated E&P that was accumulated in any pre-1983 S corporation years.

Effective for tax years beginning after May 25, 2007.

Bank accounting method adjustments A bank that changes from the reserve method for bad debts under Sec. 585 or Sec. 593 in its first tax year for which an S corporation election is in effect, the bank may elect to take into account any adjustments under Sec. 481 resulting from the change for the tax year immediately before the first S corporation tax year. This election allows the corporation to take the adjustments on the tax return for the last C corporation year.

Effective for tax years beginning after December 31, 2006.

Restricted bank director stock National banking laws require that bank directors own stock in the bank and that the bank have at least five directors. States have similar laws for state-chartered banking institutions.

For purposes of the S corporation stock eligibility rules, restricted bank director stock is not taken into account as outstanding stock of the S corporation for tax purposes.

Effective generally for tax years beginning after December 31, 2006.

Restricted bank director stock is not taken into account for purposes of the one class of stock rule for tax years beginning after December 31, 1996.

Additional expensing Additional expensing for qualified Sec. 179 Gulf Opportunity Zone (GO Zone) property is extended for one more year through December 31, 2008 for property used in highly damaged GO Zone areas.

The deadline for placing all qualified Sec. 179 Gulf Opportunity Zone property into service was December 31, 2007.

Effective for tax years beginning after May 25, 2007.

Tax-exempt qualified mortgage bond treatment will apply to finance qualified repairs or reconstruction of residences located in the GO Zone and that were damaged or destroyed by Hurricanes Katrina, Rita, or Wilma.

A qualified repair or reconstruction is defined as a repair of a home damaged by the hurricanes or the reconstruction of a home destroyed by the hurricanes only if the expenditures incurred are more than 25 percent or more of the mortgagor’s adjusted basis in the residence.

Effective for owner-financing provided after May 25, 2007 and before January 1, 2011.

Low-income housing credit Two modifications were made to the carryover allocation exception under Sec. 42(h)(1)(B) for otherwise qualifying low-income credit buildings located in the GO Zones and placed in service before January 1, 2011.

The requirement that 10 percent of the taxpayer's reasonably expected basis in the project (as of the close of the second calendar year following the calendar year of the allocation) must be incurred as of the later of six months after the allocation is made or the end of the calendar year in which the allocation is made (the 10 percent rule), has been repealed.

Also repealed is the requirement that the building must be placed in service not later than the close of the second calendar year following the calendar year of the allocation (the second-year placed in servicerule).

Therefore, an otherwise qualifying building is treated as qualifying forthe credit regardless of whether the 10 percent rule or the second-year placed in service rule are satisfied if that building in one of the GO Zones and receives an allocation in 2006, 2007, or 2008; and is placed in service before January 1, 2011.

Effective on May 25, 2007.

Placed-in-service date extended An enhanced low-income housing credit is available to taxpayers who develop housing in designated high-cost areas or difficult development areas.

The placed-in-service dates for buildings eligible for the enhanced credit (91 percent and 39 percent, respectively) available under the 2005 GO Zone Act for two additional years (2009 and 2010) for allocations made in 2006, 2007, and 2008.

Effective on May 25, 2007.