2007 Federal Tax Law Changes Impacting Small Business

The Small Business and Work Opportunity Tax Act of 2007, signed into law by President Bush in May of this year, features several new, advantageous wrinkles for small business. Here’s a round-up of the key changes for this tax year.

• Section 179—The act offers several new features, but chief among them is the extension of the Section 179 deduction. Based on the act, the maximum amount of qualifying property placed in service in 2007 that businesses can expense increases to $125,000, up $17,000 from 2006. That base rate, indexed for inflation, will remain increased for tax years 2007 through 2010. In addition, the annual investment limit increases $70,000 to $500,000 for 2007, a provision—indexed for inflation—that will remain in place through 2010. (To learn more about all the tax relief provisions contained in the act, see Technical Explanation of the Small Business and Work opportunity Tax of 2007.)
• Work Opportunity Tax Credit (WOTC)—The act expands the benefits of the credit and extends it. It had been set to expire for employees hired after December 31, 2007, and it now runs through August 31, 2011. The new law also broadens the scope of the credit.
• Self-Employment Tax remains level—For 2007, the self-employment tax rate on net earnings stays the same as it was in 2006. The rate breaks down as 15.3% for Social Security (i.e., old-age, survivors and disability insurance) and 2.9% for Medicare (hospital insurance). The one difference in the Self-Employment Tax is that the maximum amount subject to the Social Security part for tax years beginning in 2007 has increased from $94,200 last year to $97,500.
• Social Security tax increases—The maximum amount of wages subject to Social Security tax is up from $94,200 in 2006 to $97,500 in 2007. The tax rate remains level at 7.65% for employers and employees.
• Higher standard mileage rate—The mileage rate increases by 4 cents for 2007 to 48.5 cents per mile. In addition to the mileage allowance, you can deduct parking and toll costs. Starting in 2007, companies can subsidize up to $215 a month of parking, tax-free, for employees, a $10 per month increase from 2006. The cap on tax-free transit pass subsidies increases $5 for 2007, to $110 a month.
• Increased retirement plan contributions—The contribution limit for a 401(k) has been increased by $500 to $15,500 for 2007 (catch-up contributions for those age 50 or older remain the same at $5,000). The cap on SIMPLE IRA contributions increases $500 to $10,500, but the catch-up amount for those 50 or older remains at $2,500 for 2007. The basic maximum Roth IRA and traditional IRA contributions remain unchanged at $4,000, and the catch-up amount for people 50 and older also stays the same at $1,000 in 2007.
• New income tax brackets—Income tax brackets have increased and widened for 2007. For example, in 2006, if you were single and made up to $7,550, you were in the 10% bracket. In 2007, that bracket widens to $7,825. For 2006, the 15% bracket for singles topped out at $$30,650; this year it’s $31,850. The highest tax rate remains unchanged at 35%. To view all the bracket changes, check out 2007 Federal Income Tax Brackets.
• Increased standard deduction—For 2007, the standard deduction increases to $10,700 for those filing jointly (up from $10,300 in 2006); $5,350 for singles, a $200 uptick; and $7,850 for head of household, a $300 increase.
• Increased personal exemption—The personal exemption in 2006 increases by $100 to $3,400, which helps you modestly reduce your taxes for each family member you support.
• Estate tax exemption boost—The exemption for estate taxes is $2 million for tax years 2006 through 2008. In 2009, it increases to $3.5 million. The highest federal estate tax rate was 46% in 2006 and decreases to 45% for tax years 2007 through 2009.

To learn more about the tax changes for 2006 that affect you and your business, consult your accountant, CPA, or tax advisor.

From DHL Small Business.