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Small Business And Work Opportunity Tax Act

In late May, the President signed the Small Business and Work Opportunity Tax Act of 2007 to help businesses absorb the cost of a higher federal minimum wage, which was raised to $5.85 per hour on July 24, 2007. Many states elected to absorb the wage hike over the next two years, such as Pennsylvania which chose to raise the state minimum wage to $7.15 on July 1, 2007 to anticipate the federal increase to $7.25 on July 24, 2009. The Act consists of nearly $5 billion in tax breaks, primarily to small businesses. There are a number of incentives this law outlines:


  • In Section 279, both the dollar and investment limitations are increased. 
  • For the years beginning in 2007 through 2010, the dollar limit is $125,000, while the total investment limit is up to $500,000. 
  • The FICA tip credit will be based on the prior minimum wage of $5.15/hour.
  • There will be a widened scope of credit that extends the Work Opportunity Tax Credit through August 31, 2011. 


The new law includes several provisions that will assist Subchapter S corporations:


  • The 2007 Small Business Tax Act provides capital gain income from the sale of stock, and securities will no longer be treated as passive investment income. 
  • A sale of Qsub stock that terminates the election and creates a new corporation will be treated as a sale of an undivided interest in the assets of the Qsub. 
  • The Act allows an Electing Small Business Trust (ESBT) to deduct interest paid on money borrowed to acquire S corp stock. An S Corp is then allowed to reduce its accumulated earnings and profits by any pre-1983 E & P accumulated while an S corp. 


The Act also extends and enhances some of the tax incentives in the Gulf Opportunity Zone Act of 2005 and Katrina Emergency Tax Relief Act of 2005. This includes offers in special expensing for qualified property, enhanced low-income housing credit and flexible tax-exempt bond financing rules. In addition, the Act broadens the “kiddie tax” by raising the age limit to include one child under age 19 and two students under age 24.


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