Congress has sometimes been known to include in the laws it writes provisions which are not necessarily related to the main subject of the bill. This is particularly true when the bill is mainly for appropriations - the need to pay for essential government functions can help other, unrelated matters pass into law.
That's what happened in the case of the U.S. Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq Accountability Appropriations Act, signed into law in May of this year. This law provided billions of dollars for the war in Iraq and Afghanistan, as well as additional funds for hurricane relief, the Justice Department, the State Department, and other government activities. And, beginning on page 80 of the 108-page law, the Small Business and Work Opportunity Tax Act of 2007 ("SBWOTA") makes its appearance. This article will explain some of the key provisions of SBWOTA.
Some of the provisions of SBWOTA are favorable to taxpayers. For example, the new law will benefit Subchapter S corporations which realize capital gains from the sale of stock. Such S corporations generally are not subject to tax at the corporate level; rather, their profits are taxed to their stockholders. But an exception applies to S corporations with more than 25% of their gross receipts coming from passive investment income (such as interest, dividends, royalties, rents, and annuities). If the corporation exceeds that limit, it may be subject to income tax at the highest corporate-level rate - and if the corporation has more than 25% of its gross receipts from passive investment income for three years in a row, it may lose the right to be classified as an S corporation entirely.
The new law gives S corporations a little more breathing room. Gains from the sale of stock or securities, which formerly were classified as passive investment income, are no longer classified as such. Consequently, an S corporation can now realize capital gains from the sale of stock without running the risk of having corporate-level income tax or losing S corporation status.
Other provisions of SBWOTA are less favorable to taxpayers, though. For example, one provision expands the application of the "kiddie tax." The "kiddie tax" subjects children's unearned income (such as interest, dividends, and capital gains) to tax at their parents' tax rate if that rate is higher than the child's tax rate (which it normally is). The kiddie tax has the effect of discouraging parents from shifting income to their children in hopes of reducing their tax burden, but it also imposes a heavier tax burden on children who happen to have significant interest or dividend income from their own funds.
Previously, the kiddie tax applied to children who had not reached age 18 by the end of the tax year. However, the new law applies the kiddie tax to 18-year-olds. In addition, the kiddie tax will now also apply to young people who are full-time students over 18 but under age 24, if their earned income does not exceed one-half of their total support for the year.
In addition, the Internal Revenue Service requires the payment of user fees to apply for ruling letters, opinion letters, determination letters, and other similar requests. Until recently, however, the requirement of user fees was set to expire in the year 2014. SBWOTA has removed the sunset date; therefore, taxpayers can expect the requirement of user fees to be permanent.
SBWOTA also increases the minimum penalty for bad checks and money orders. The penalty imposed for a bad check or money order tendered to the IRS is generally 2% of the amount of the check. Formerly, there was a minimum penalty of $15 for bad checks with a face amount up to $750; now, however, the minimum penalty will be $25 for bad checks with a face amount up to $1,250. (However, if the face amount of the bad check or money order is less than $25, the penalty will be equal to that face amount. This way, the penalty will not exceed 100% of the face amount.)
Another provision of SBWOTA extends the penalties for erroneous claims for refunds or credit. Under the new law, a taxpayer who makes an excessive claim for refund or credit, without a reasonable basis for such claim, will be liable for a penalty of 20% of the excessive amount. Previously, such penalties only applied when the taxpayer made a "substantial valuation misstatement," that is, when the taxpayer claimed a value for property at least twice the actual value.
The new law also includes an unusual provision of limited application. Corporations are normally required to make quarterly estimated tax payments toward their income tax liability. However, prior law required that for the quarterly estimated tax payment due in the third quarter of 2012 (between July 1 and September 30), corporations with assets over $1 billion should increase their quarterly tax payment to 106.25% of what it would otherwise be (and reduce their fourth quarter estimated tax payment correspondingly). Now, however, that increased tax payment in the third quarter of 2012 will be 114.25% of what it would otherwise be, with the fourth quarter estimated tax payment still being reduced accordingly. The purpose of this provision may be to help balance the Federal government's budget for the fiscal year ending September 30, 2012, by having some taxes paid sooner rather than later. Of course, this could well leave the government short of cash in the following fiscal quarter - a very unusual form of long-term planning.
If you are interested in learning more about the tax provisions of the Small Business and Work Opportunity Tax Act - - and applying its opportunities to your business, please give us a call at 312-372-1040 (or 800-372-1040 nationally).
Joshua S. Kreitzer (B.A., Harvard University ; M.A., University of South Florida ; and J.D., Northwestern University ) is Senior Associate Attorney with The Law Offices of Marc J. Lane, a Professional Corporation.
The Lane Report is a publication of The Law Offices of Marc J. Lane, a Professional Corporation. We attempt to highlight and discuss areas of general interest that may result in planning opportunities. Nothing contained in The Lane Report should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein. Copyright © 2007 by The Law Offices of Marc J. Lane, A Professional Corporation. Reproduction, in whole or in part, is forbidden without prior written permission.