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Small Business and Work Opportunity Tax Act of 2007

President Bush signed H.R. 2206, Small Business and Work Opportunity Tax Act of 2007 (SBWOTA) on May 25, 2007. This is the bill that provides continued funding for the Iraq War. Tax reductions totaling $4.8 billion for small businesses were added to counter the economic impact of the increase in the minimum wage. Although the bill doesn't contain any provisions specific to timber activities, if you run a small business and/or are located in one of the Gulf Opportunity Zones you should discuss the changes with your tax advisor. Here's a summary of what we consider relevant changes.

Sec. 179 Deduction Limits. Rather than depreciating tangible personal property purchased and placed in service during the year, Sec. 179 allows the cost to be deducted against business income, subject to a $100,000 per year limit, and a phase out threshold for expenses totaling more than $400,000. This treatment applied to expenditures after Dec. 31, 2002 and before Jan. 1, 2010. The new law effectively increases the limit to $125,000 and the phase out threshold to $500,000 for 2007. Sec. 179 treatment was also extended for 1 year to tax years beginning before Jan. 1, 2011. Also, the cost of living inflation adjustment will apply to the $125,000 and $500,000 amounts.

Additional Sec. 179 Expensing Extended for Hardest Hit Area of Gulf Opportunity Zone. The change to Sec. 179 discussed above applies to all taxpayers. In addition, SBWOTA extended through 2008 the increased limit and phase out amounts provided under HR 4440, Gulf Opportunity Zone Act of 2005. The extension applies only to property substantially all of the use of which is in the Louisiana parishes of Calcasieu, Cameron, Orleans, Plaquemines, St. Bernard, St. Tammany and Washgington, and the Mississippi counties of Hancock, Harrison, Jackson, Pearl River, and Stone. The increases are an additional $100,000 on the limit (total of $212,000 for 2007), and up-to $600,000 for the phase-out (total of $1,050,000 for 2007). These totals sill be higher in 2008 after adjustment for inflation.

Spousal partnerships.

Background - The tax treatment of spouses that jointly own timberland can be confusing. The simplest case is when the timber activity is an investment, not a business, all the income from the activity is capital gains, and the couple files a joint return. Here there is no self-employment tax issue because capital gains aren't subject to this tax. By filing jointly any investment expenses are reported on the couple's Schedule A, Form 1040, and capital gains on Schedule D, Form 1040. If the couple files separately the deductions and capital gains must be split between spouses to be reported on their individual Form 1040. If the activity constitutes and is treated as a business, there is a presumption that the activity constitutes a partnerships. As such the business must file a Form 1065 informational return with K1's allocating items of income and expenses to the spouses. This is the case even if the spouses file jointly. Capital gains would be allocated to the K1's to be reported on the joint Schedule D, Form 1040. Any operating income would be reported on the spouse's individual Schedule SE's, assuming that the spouses share equally in the ownership and management of the business. If this is not the case, then one of the spouses may be considered an employee of the business and the business would be required to withhold employment taxes and income tax.

Change - The new law provides that when spouses conduct a qualified joint venture and file jointly for the tax year, the joint venture is not treated as a partnership for tax purposes. Rather, each spouse reports their share of income and expenses on the appropriate form, usually Schedule C, Form 1040. Again, any ordinary income would be subject to the self-employment tax determined on Schedule SE, Form 1040. A qualified joint venture is any joint venture involving the conduct of a trade or business if: (1) the only members are a husband and wife, (2) both spouses materially participate according to the criteria of the passive loss rules without regard to the rule that treats participation by one spouse as participation by the other, and (3) both spouses elect for this rule to apply. Guidance has not been provided yet on how the election is to be made. This change is effective for tax years beginning after Dec. 31, 2006.