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President Bush signs H.R. 2206June 5, 2007On May 25, 2007, President Bush signed H.R. 2206, an emergency war supplemental spending bill that includes $4.8 billion in net tax benefits, an increase in the minimum wage, and four pension-related technical corrections benefiting specific taxpayers (e.g., various airlines). The following is a summary of selected income tax provisions contained in Subtitle B of Title VIII of H.R. 2206 entitled "The Small Business and Work Opportunity Tax Act of 2007." Please see H.R. 2206 for complete coverage. Note! The Small Business and Work Opportunity Tax Act of 2007 is referred to in this outline as the 2007 Small Business Act. A. UNEARNED INCOME OF CHILDREN UNDER AGE 19 OR FULL-TIME STUDENTS UNDER AGE 24 AT THE END OF THE TAX YEAR MAY BE TAXED AT PARENTS' RATES (§1(g)(2)(A), Effective tax years beginning after May 25, 2007) - For 2005 and prior years, children under age 14 at the end of the tax year were taxed on their unearned income (e.g., interest and dividends) at their parents' marginal tax rate if the unearned income exceeded a threshold amount (e.g., $1,600 for 2005). The Tax Increase Prevention and Reconciliation Act of 2005 increased the age of children subject to this tax to those under age 18, effective for years beginning after 2005. Therefore, for calendar year 2007, children under age 18 at the end of the tax year are taxed at their parents' tax rate on their unearned income in excess of $1,700. The 2007 Small Business Act provides that, effective for tax years beginning after May 25, 2007, a child's unearned income in excess of the threshold amount ($1,700 as indexed for inflation) will be taxed at the parents' rates if: 1. The child either: a) has not attained age 18 before the close of the tax year (same as current law); or b) the child i) is either age 18 by the close of the tax year or is age 19 through 23 by the close of the tax year and is a full-time student and ii) has earned income for the tax year that does not exceed one-half the child's support for the year; 2. Either parent of the child is alive at the close of the tax year; and 3. The child does not file a joint return for the tax year. Observation! Fortunately, this 2007 expansion of the kiddie tax to children over age 17 will not be effective for calendar-year taxpayers until 2008. B. 179 DEDUCTION INCREASED TO $125,000 AND PHASE-OUT THRESHOLD INCREASED TO $500,000 (§179(b), §179(c), and §179(d); Effective for property placed-in-service in tax years beginning after 2006 and before 2011) - The 2007 Small Business Act increases the $100,000 amount that a taxpayer can deduct as a §179 expense to $125,000 and increases the $400,000 phase-out threshold amount to $500,000 for tax years beginning after 2006. Prior to the changes made by the 2007 Small Business Act, the $100,000 expense amount and $400,000 phase-out threshold were adjusted for inflation to $112,000 and $450,000, respectively, for tax years beginning in 2007. Thus, for tax years beginning in 2007, the Small Business Act increases the §179 expense limitation from $112,000 to $125,000, and increases the phase-out threshold from $450,000 to $500,000. The 2007 Small Business Act also extends the increased $125,000 §179 deduction amount and the increased $500,000 phase-out threshold amount for an additional year (through tax years beginning before 2011). In addition, the Act provides for indexing the $125,000 amount and the $500,000 threshold for inflation for tax years beginning after 2007. Also, the Small Business Act extends for one year (through tax years beginning before 2011) the inclusion of off-the-shelf computer software in the definition of §179 property. Finally, the Act extends the ability of taxpayers to make, revoke or change a §179 deduction on an amended return for one year (to tax years beginning before 2011). Observation! This increase in the §179 deduction is effective for property placed-in-service for tax years beginning after 2006. Thus, for calendar-year taxpayers, the new increased limits apply retroactively to all qualifying §179 property placed-in-service in 2007, even though the 2007 Small Business Act was not signed into law until May 25, 2007. C. HUSBAND AND WIFE MAY ELECT TO TREAT PARTNERSHIP AS JOINT VENTURE (§761(f) and §1402(a)(17), Effective tax years beginning after 2006) - Under the 2007 Small Business Act, where a husband and wife file a joint return for the tax year, and operate a trade or business that is a "qualified joint venture," they may elect to treat the business as two separate proprietorships rather than as a partnership. If the election is made, all items of income, gain, loss, deduction, and credit are divided between the spouses according to their respective interests in the business as if the items were attributable to a proprietorship trade or business and each spouse reports his or her share on the appropriate form, such as Form Schedule C. Note! The income or loss reported by each spouse is taken into account by such spouse in determining the spouse's net earnings from self-employment. A "qualified joint venture" means any venture involving the conduct of a trade or business if: 1) the only members of the venture are a husband and wife, 2) both spouses materially participate (under the §469(h) passive loss rules without attribution from the other) in the trade or business, and 3) both spouses elect the application of this rule. D. S CORP CAPITAL GAINS NO LONGER PASSIVE INCOME (§1362(d)(3)(B)(ii) and §1362(d)(3)(C), Effective for tax years beginning after May 25, 2007) - S corporations with earnings and profits (E & P) from C corporation years are subject to a 35% excess passive income tax under §1375 if more than 25% of the S corporation's gross receipts are from passive investment income. In addition, under §1362, the corporation's S election will terminate at the end of the third year if the S corporation has excessive passive income for three consecutive years. Prior to the Act, passive income generally included royalties, rents, dividends, interest, annuities, and gains from sales or exchanges of stock or securities. The 2007 Small Business Act provides that, effective for tax years beginning after May 25, 2007, gains from sales or exchanges of stock or securities are not passive income for purposes of the excess passive income test under §1362 and §1375. E. PRE-1983 E & P GENERATED DURING AN S CORPORATION YEAR ELIMINATED (Act §8235, Effective tax years beginning after May 25, 2007) - Currently, S corporations do not generate earnings and profits (E & P) during a year in which a valid S corporation election is in effect. However, for tax years beginning before 1983, earnings and profits (E & P) could be created from certain transactions even though the corporation was an S corporation. Congress previously removed this E & P generated in pre-1983 S years for corporations that were S corporations during the first tax year beginning after 1996. The 2007 Small Business Act, in effect, eliminates all E & P generated during a tax year beginning before 1983 in which a valid S election was in effect whether or not the corporation was an S corporation for its first tax year beginning after 1996. F. SALE OF INTEREST IN QSUB (§1361(b)(3)(C), Effective tax years beginning after 2006) - If an S corporation owns 100% of another corporation, the subsidiary cannot make a valid S election because the subsidiary has a corporate shareholder (the S corporation parent). However, the S corporation (the parent) can make a qualified S corporation subsidiary election (a QSub election). If a QSub election is made, the subsidiary is deemed to have liquidated into the S corporation parent. Therefore, all the income, expenses, assets, and liabilities of the subsidiary are reported on the S corporation parent's Form 1120S. If the parent revokes the QSub election or loses the election because the parent no longer owns 100% of the stock, then the parent is treated as transferring all the assets and liabilities of the subsidiary to a new corporation in return for the new corporation's stock. This will generally be a tax-deferred §351 transfer. However, example 1 of IRS regulation 1.1361-5(b)(3) makes it clear that if the parent sells more than 20% of the QSub's stock, the resulting "deemed" transfer of all the subsidiary's assets to a new corporation in exchange for the new corporation's stock will not be a qualifying §351 transfer because the parent does not own 80% or more of the stock of the new corporation immediately after the transfer. For example, according to the regs, a sale of 21% of the QSub's stock triggers 100% (not 21%) of the appreciation in the QSub's assets. Effective for tax years beginning after 2006, the 2007 Small Business Act provides that where the sale of QSub stock results in the termination of the QSub election, the sale is treated as a sale of an undivided interest in the assets of the QSub (to the extent of the percentage of stock sold) followed by a deemed §351 transfer of the assets and liabilities to the QSub. Thus, in the above example, the S corporation will be treated as selling a 21 percent-interest in all the assets of the QSub to the unrelated party, followed by a transfer of the assets to a new corporation in a transaction to which the tax-deferred provisions of §351 applies. Thus, the S corporation will recognize 21 percent (not 100%) of the gain or loss in the assets of the QSub. Caution! Even after this change, IRC §357(c) could trigger additional gain (even in a §351 transfer) to the selling parent corporation where the liabilities of the former QSub exceed the tax bases in its assets. G. ESBTS MAY DEDUCT INTEREST ON DEBT USED TO ACQUIRE S CORPORATION STOCK (§641(c)(2), Effective tax years beginning after 2006) - An electing small business trust ("ESBT") is a qualifying S corporation shareholder. However, the ESBT is subject to tax at a 35% rate on the portion of the trust's income related to S corporation stock (see §641(c)). Prior to the Act, interest incurred to buy S corporation stock was not deductible in determining the taxable income of the ESBT related to the S corporation. However, effective for tax years beginning after 2006, interest paid or accrued on indebtedness to acquire S corporation stock may be deducted in computing the taxable income of the S portion of an ESBT. H. BANKS ELECTING S STATUS MAY TAKE ADJUSTMENT FROM USE OF RESERVE METHOD INTO ACCOUNT IN LAST C CORPORATION TAX YEAR (§1361(g), Effective tax years beginning after 2006) - Financial institutions electing S status may not continue to use the reserve method of accounting for bad debts. Generally, if they elect S status, they must change from the reserve method and take any resulting §481 adjustment into account over four years. If the change in accounting for bad debts is made in the initial year of the S election, one-fourth of the effect of the change is taken into account for the year of the change and one-fourth is taken into account in each of the succeeding three years. Each year, the adjustment is taken into account in determining the income of the S corporation's shareholders and in computing the S corporation's §1374 built-in gains tax. Effective for tax years beginning after 2006, the 2007 Small Business Act allows a bank changing from the reserve method for bad debts under §585 or §593 in its first tax year for which an S election is in effect, to elect to take the §481 adjustment into account in the bank's last C corporation year (i.e., the year before the S election is first effective). Planning! Banks may save taxes by electing this new provision and accelerating the §481 adjustment at the corporate level into the last C corporation year. Although the income from the §481 adjustment will be accelerated, the tax to the shareholders will be deferred until the earnings and profits from the §481 adjustment are distributed. In addition, if the distribution of the E&P occurs before 2011, the dividend distribution should be subject to the maximum federal tax on qualifying dividends of 15%. I. NEW RULES FOR RESTRICTED BANK DIRECTOR STOCK IN S CORPORATIONS (§1361(f) and §1368(f), Generally effective for tax years beginning after 2006) - The 2007 Small Business Act makes the following changes in treatment of restricted stock owned by a director in a bank that is an S corporation: Not Counted As Outstanding Stock. The Act provides that restricted bank director stock is not taken into account as outstanding stock of the S corporation for tax purposes (including the 100 maximum shareholder rule). Thus, this stock will be allocated no pass through items of income, loss, etc. Note! Although these new rules are generally effective for tax years beginning after 2006, the Act provides that restricted director stock is not taken into account for purposes of the one class of stock rule retroactively for tax years beginning after 1996. Distributions Received By Directors That Are Not A Full Or Partial Payment For Stock. If a director receives a distribution from an S corp with respect to restricted bank director stock that is not a full or partial payment for his or her stock, the amount of the distribution 1) is includible in the income of the director, and 2) is deductible by the S corporation for the corporation's tax year in which or with which the amount is included in the director's income. Restricted Bank Director Stock. Restricted bank director stock means stock in a bank (as defined in §581) or a depositary institution holding company (as defined in §3(w)(1) of the Federal Deposit Insurance Act), if the stock: 1) must be held by an individual under federal or state law in order to allow the individual to serve as a director; and 2) is subject to an agreement with the bank or company (or a corporation that controls (under §368(c)) the bank or company) under which the holder must sell back the stock at the price the individual paid for the stock upon ceasing to hold the office of director. J. WORK OPPORTUNITY CREDIT MODIFIED (§51(b)(3), §51(c)(4)(B), §51(d)(1), §51(d)(3), §51(d)(5), §51(d)(6)(B)(iii), Effective for individuals beginning work after May 25, 2007 and before September 1, 2011) - Credit Available For Individuals Beginning Work Before September 1, 2011. A work opportunity tax credit (WOTC) is available for a percentage of wages paid to individuals belonging to a "targeted group." Prior to the 2007 Small Business Act, the WOTC was to expire for individuals beginning work after 2007. The Act extends the WOTC to qualifying individuals who begin work before September 1, 2011. Changes To "High Risk Youth" Group. The Act 1) renames the targeted group consisting of "high risk youths" as "designated community residents," 2) expands the individuals that qualify to include otherwise qualifying individuals age 18 but not yet 40 (previously 25) on the hiring date, and 3) adds to the list of qualifying individuals otherwise qualifying individuals from rural renewal counties (previously only individuals living within an empowerment zone, enterprise zone or renewal community qualified). Changes To "Vocational Rehabilitation Referral" Group. A "vocational rehabilitation referral" is an individual who is certified by a designated local agency as 1) having a physical or mental disability that, for the individual, is, or results in, a substantial handicap to employment, and 2) having been referred to the employer while receiving, or after completing, specified rehabilitative services. Under pre-2007 Small Business Act law, the rehabilitative services must have been provided under either: a) an individualized written plan for employment under a state plan for vocational rehabilitation services approved under the Rehabilitation Act of 1973, or b) a vocational rehabilitation program for veterans under Title 38 USC, Chapter 38. The 2007 Small Business Act adds, as a third qualifying category, c) an individual work plan developed and implemented by an employment network under Social Security Act §1148(g) with respect to which the requirements of Social Security Act §1148(g) are met (i.e., a "Ticket to Work" plan). Enhanced WOTC For Employment Of Certain Disabled Veterans. One of the target groups qualifying for the WOTC is "qualified veterans." Under pre-2007 Small Business Act law, a "qualified veteran" included only an individual who: 1) was a "veteran," which requires that a person be certified by the designated local agency as a) having served on active duty (other than for training) in the U.S. Armed Forces for more than 180 days or having been discharged or released from active duty in the U.S. Armed Forces for a service-connected disability; and b) if, the individual served a period of active duty of more than 90 days (other than for training), none of that more-than-90-day period was during the 60-day period ending on the hiring date; and 2) was certified by the designated local agency as being a member of a family receiving assistance under a food stamp program under the Food Stamp Act of 1977 for a three-month period ending during the 12-month period ending on the hiring date. In addition, prior to the 2007 Small Business Act, the maximum WOTC available with respect to any employee that was a qualified veteran was $2,400, i.e., 40% of up to $6,000 of qualified first-year wages. The 2007 Small Business Act expands the definition of "qualified veterans" to include individuals meeting the requirements of items 1) and 2) above as under prior law or individuals who a) meet the requirements of item 1) above and b) who are entitled to compensation for a service-connected disability, and c) have a hiring date that isn't more than one year after having been discharged or released from active duty in the U.S. Armed Forces, or have aggregate periods of unemployment during the 1-year period ending on the hiring date that equal or exceed six months. In addition, the 2007 Small Business Act increases the amount of qualified first-year wages that can be taken into account in determining the WOTC to $12,000 (instead of $6,000) for "veterans" who qualify for the credit because they are receiving compensation for a service-connected disability. Thus, if an employee is a qualified veteran who satisfies the compensation-for-disability requirement, the maximum WOTC available to the employer with respect to the qualified veteran is $4,800 (i.e., 40% x $12,000), instead of the $2,400 maximum available with respect to other qualified veterans, and members of most other targeted groups. K. WORK OPPORTUNITY TAX CREDIT AND FICA TIP CREDIT CAN OFFSET AMT LIABILITY (§38(c)(4)(B), Effective for credits determined in tax years beginning after 2006 and to carrybacks of those credits) - The 2007 Small Business Act allows the FICA tip credit determined under §45B, and the WOTC determined under §51 to offset the alternative minimum tax. This new rule is effective for credits determined in tax years beginning after 2006 and to carrybacks of those credits. Therefore, a taxpayer with a WOTC or FICA tip credit determined in 2007 that is not fully used against the regular tax liability or AMT liability in 2007 can carry back any unused credits to use against the taxpayer's regular tax liability or AMT liability in tax year 2006. (Reminder! Unused WOTC and FICA tip credits can be carried back one year and carried forward 20 years). L. FICA TIP CREDIT NOT REDUCED BY INCREASE IN MINIMUM WAGE AFTER JANUARY 1, 2007 (§45(b)(1)(B), Generally effective for services performed after 2006) - A general business credit (the "FICA tip credit") is provided equal to an employer's FICA taxes paid on tips (received in connection with providing, food or beverages for consumption) in excess of the amount of the tips treated as wages for purposes of meeting the minimum wage requirements of the Fair Labor Standards Act (FLSA). The 2007 Small Business Act provides that the amount of the FICA tip credit is based on the amount of tips in excess of those treated as wages for purposes of the FLSA as in effect on January 1, 2007. Therefore, under the Act, the FICA tip credit is determined based on a minimum wage of $5.15 per hour. Thus, the FICA tip credit won't be affected by any future minimum wage increases. For example, the increase in the minimum wage hourly rate to $7.25 over the next two years in three 70-cent increments that are part of the 2007 Small Business Act won't affect the FICA tip credit. M. RETURN PREPARER PENALTIES INCREASED AND MODIFIED (§6694(a), §6694(b), and §7701(a)(36); Effective for returns prepared after May 25, 2007) - First-Tier Understatement Penalty. For returns prepared before May 26, 2007, §6694(a) provided for a $250 per return preparer penalty if 1) any part of the understatement of tax liability on an income tax return or claim for refund was due to a position taken on the return for which there was not a realistic possibility of being sustained on its merits. (Regulation 1.6694-2(b) provides that a return position has a realistic possibility of being sustained on its merits if a realistic and well-informed analysis by a person knowledgeable in the tax law would conclude that the position has at least a one in three likelihood of being sustained on its merits); 2) the return preparer knew (or reasonably should have known) of such position; and 3) such position was not disclosed as provided under §6662(d)(2)(B)(ii) or the position was disclosed, but, the position was frivolous. The $250 penalty was waived if reasonable cause was shown. For returns prepared after May 25, 2007, the 2007 Small Business Act increases the first tier preparer penalty under §6694(a) from $250 to the greater of 1) $1,000 or 2) 50% of the income derived (or to be derived) by the tax return preparer from the return or claim for refund. In addition, the Act provides that the $1,000 penalty will apply if 1) any part of the understatement of tax liability on a return or a refund claim is due to a position taken on the return for which there was not a reasonable belief that the position would more likely than not be sustained on its merits (apparently, a position would more likely than not be sustained on its merits if the position has a more than 50% chance of being sustained on its merits;) 2) The tax return preparer knew (or reasonably should have known) of the position; and 3) The position was not disclosed as provided under §6662(d)(2)(B)(ii) or the position was disclosed, but, there was no reasonable basis for the position. However, no penalty will be imposed if it is shown that there is reasonable cause for the understatement and the tax return preparer acted in good faith. Observation! In some cases, individuals who prepare their own returns are held to a lesser standard than paid return preparers under the new law. For example, a taxpayer can avoid the 20% accuracy penalty under §6662 if the taxpayer does not follow an IRS revenue ruling or notice by showing that the position taken on the return has at least a one-in-three chance of success (see Reg. 1.6662-3(a)). However, a paid preparer of such return would, apparently, be required to show that the position taken on the return has a more than 50% chance of success to avoid the first-tier preparer penalty. Second-Tier Understatement Penalty. For returns prepared before May 26, 2007, §6694(b) provided that any tax return preparer who prepares an income tax return or claim for refund with respect to which any part of an understatement of liability is due to 1) a willful attempt in any manner to understate the liability for tax on the return or claim, or 2) a reckless or intentional disregard of rules or regulations shall pay a $1,000 penalty with respect to each such return or claim. For returns prepared after May 25, 2007, the 2007 Small Business Act increases the penalty for willful or reckless conduct to an amount equal to the greater of 1) $5,000, or 2) 50 percent of the income derived (or to be derived) by the tax return preparer with respect to the return or claim. The amount of any second tier penalty ("willful or reckless conduct penalty") is reduced by the amount of any first tier penalty discussed above. Definition Of Tax Return Preparer. For returns prepared before May 26, 2007, the preparer penalties under §6694 were only applicable to preparers of income tax returns or claims for income tax refunds. Therefore, before May 26, 2007, these preparer penalties did not apply to preparers of estate, gift, excise, or employment tax returns. For returns prepared after May 25, 2007, the Act modifies §7701(a)(36) so that the §6694 preparer penalties apply to preparers of income, estate, gift, exempt organization, employment, and excise tax returns. Otherwise, the §7701(a)(36) definition or return preparer was not changed. Observation! These new rules will apply to 2006 returns under extension, if prepared after May 25, 2007! N. NEW 20% PENALTY FOR FILING REFUND CLAIMS FOR "EXCESSIVE AMOUNTS" (§6676(a), Effective for claims filed after May 25, 2007) - Under pre-2007 Small Business Act law, there was no separate penalty imposed on the filing of refund claims that had no basis in fact or law. The accuracy penalties generally do not apply unless there is an underpayment of tax. They do not apply to claims for refund. If a taxpayer wrongfully claimed a refund, there might be no penalty if there was no additional tax liability attributable to the wrongful claim (i.e., where the IRS did not assess tax in excess of the tax shown on the original return). Apparently, some taxpayers have been over withholding and later aggressively claiming credits that resulted in refunds without the possibility of an accuracy penalty. Under the 2007 Small Business Act, if a claim for refund or credit for income tax (other than a claim for refund or credit relating to the earned income credit) is made for an "excessive amount" after May 25, 2007, the person making the claim is liable for a penalty equal to 20% of the disallowed portion of a claim for refund or credit for which there is no "reasonable basis" for the claimed tax treatment. An "excessive amount" is the amount by which a person's claim for refund or credit for any tax year exceeds the amount of the claim allowable under the Code for that tax year. Thus, the penalty is equal to 20% of the disallowed portion of the claim for refund or credit for which there is no reasonable basis for the claimed tax treatment. O. IRS NOW HAS 36 MONTHS AFTER RETURN FILED (RATHER THAN 18 MONTHS) TO NOTIFY TAXPAYERS OF ASSESSMENT BEFORE INTEREST AND PENALTIES ARE SUSPENDED ON ASSESSMENT (§6404(g)(1)(A) and §6404(g)(3)(A), Effective for notices provided after November 25, 2007) - For notices filed before November 26, 2007, §6404(g) requires the IRS to suspend the accrual of interest and time sensitive penalties if the IRS does not provide a notice specifically stating the amount and basis for the taxpayer's liability within 18 months following the date that is the later of 1) the original due date of the return (without regard to extensions) or 2) the date on which the taxpayer timely filed the return. Under §6404(g)(3), the suspension of the accrual of interest and penalties begins upon the expiration of the 18-month notification period and ends 21 days after the date on which the Service provides the notice to the taxpayer. For notices filed after November 25, 2007, the 2007 Small Business Act increases the 18-month period mentioned in the preceding paragraph to 36 months. P. IRS USER FEES WILL NO LONGER EXPIRE ON OCTOBER 1, 2014 (§7528(c), Generally effective May 25, 2007) - Prior to the 2007 Small Business Act, the user fees IRS charges for private letter rulings, determination letters, information letters, and other taxpayer services were set to expire for requests made after September 30, 2014. The Act removes the September 30, 2014 expiration date for the IRS user fee program. Q. INCREASE IN PENALTY FOR BAD CHECKS AND MONEY ORDERS (§6657, Effective for checks or money orders received after May 25, 2007) - Prior to the Act, the penalty for a bad check or money order for less than $750 was $15 or the amount of the check or money order, whichever was less. The 2007 Small Business Act provides that for checks or money orders received after May 25, 2007 for less than $1,250, the penalty is $25 or the amount of the check or money order, whichever is less. The penalty for amounts of $1,250 or more is 2% of the amount of the check or money order. R. LEVIES TO COLLECT FEDERAL EMPLOYMENT TAXES EXCEPTED FROM PRE-LEVY DUE PROCESS HEARING (§6630(f)(3) and §6630(h), Effective for levies issued after September 21, 2007) - Generally, the IRS may not levy against a person's property unless it first notifies the person in writing of his or her right to a pre-levy Collection Due Process hearing (CDP hearing). However, the IRS is not required to send the notice if it believes the collection of tax is in jeopardy or if the IRS is levying on a State to collect federal tax from a state tax refund. The 2007 Small Business Act provides that the notice and opportunity for a hearing before a levy do not apply to "disqualified employment tax levies." However, the taxpayer must be provided an opportunity for a post-levy CDP hearing within a reasonable time after the levy. A "disqualified employment tax levy" is any levy to collect employment taxes for any tax period if the person subject to the levy (or a predecessor) requested a hearing under §6330 for unpaid employment taxes arising in the most recent 2-year period before the beginning of the tax period for which the levy is served. S. INCREASED §179 DEDUCTION FOR GO ZONE PROPERTY EXTENDED ONE YEAR (THROUGH 2008) FOR PROPERTY IN HIGHLY DAMAGED GO ZONE AREAS (§1400N(e)(2), Effective tax years beginning after May 25, 2007) - The maximum §179 deduction is increased by $100,000 (not indexed) and the phase-out threshold is increased by $600,000 (not indexed) for qualifying §179 property placed-in-service anywhere in the GO Zone after 8/27/05 and before 2008. For example, the limitations are $225,000 and $1,100,000, respectively, for 2007. The 2007 Small Business Act provides that property substantially all of the use of which is in the Louisiana parishes of Calcasieu, Cameron, Orleans, Plaquemines, St. Bernard, St. Tammany and Washington, and the Mississippi counties of Hancock, Harrison, Jackson, Pearl River, and Stone, qualifies for the additional §179 deduction available for qualified §179 Gulf Opportunity Zone property if it is placed-in-service before January 1, 2009. Therefore, qualifying §179 property placed-in-service during 2008 will qualify for the additional §179 deduction only if located in the Louisiana parishes or the Mississippi counties listed above. T. AUTHORITY TO ISSUE TAX-EXEMPT PRIVATE ACTIVITY BONDS EXPANDED FOR GO ZONE REPAIRS AND RECONSTRUCTION (§143 and §1400N(a)(7), Effective for owner financing provided after May 25, 2007 and before 2011) - The 2007 Small Business Act, waives the Mortgage Revenue Bond program's 20-year and existing walls rules for qualified rehabilitation in the GO Zone, Rita GO Zone, and Wilma GO Zone for owner-financing provided after enactment of the 2007 Small Business Act and before January 1, 2011. U. MODIFICATION OF LOW-INCOME HOUSING CREDIT RULES FOR BUILDINGS PLACED-IN-SERVICE IN GO ZONES BEFORE 2011 (§1400N(c)(3)(A) and §1400N(c)(5), Effective May 25, 2007) - Gulf Opportunity Zone, Rita GO Zone and Wilma GO Zone legislation provided affected Gulf States with additional low-income housing tax credits to spur the construction of housing for Gulf Coast residents in the form of affordable rental units. The earlier legislation also provided that properties financed by tax credits placed-in-service in the calendar years 2006, 2007, and 2008 would be treated as Difficult to Develop Areas (DDA), which provides a 30% boost in eligible basis for the properties. These Go Zone Acts required developments to be placed-in-service by the end of 2008, and the DDA designation was set to expire at the same time. The 2007 Small Business Act extends the placed-in-service deadline for the GO Zones tax credits and the GO Zones' DDA designation for two years, through December 31, 2010. In addition, the Act repeals the low-income housing credit carryover allocation rule's 10% and second-year placed-in-service requirements for buildings placed-in-service in the GO Zones before 2011 and for which allocations are made in 2006, 2007, or 2008. V. COMMUNITY DEVELOPMENT BLOCK GRANTS DON'T REDUCE LOW-INCOME HOUSING CREDIT PERCENTAGE OR BASIS FOR BUILDINGS PLACED-IN-SERVICE IN GO ZONES BEFORE 2011 (§1400N(c)(6), Effective May 25, 2007) - The 2007 Small Business Act modifies the definition of below-market federal loan for otherwise qualifying buildings located in the GO Zones that are placed-in-service during the period beginning on January 1, 2006 and ending on December 31, 2010, by effectively providing that a community development grant will not cause an otherwise qualifying building to be treated as federally subsidized for purposes of the low-income housing credit. Therefore, under the 2007 Small Business Act, eligible buildings in the GO Zones that receive community block grants will nonetheless qualify for the full, enhanced low-income housing credit. |
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