The Representor - Fall 2007

The Subject is Taxing!
Reviewing the main points of an early 2007 tax law
by Stanton B. Herzog
ERA CPA & Audit/Accounting Consultant
Stanton B. Herzog, CPA, principal in the firm of Applebaum, Herzog & Associates, P.C., Deerfield, Ill., serves as ERA's accountant and is a regular contributor to The Representor. He is available to speak at chapter or group meetings on a variety of financial and tax-related topics. He also participates in Expert Access, the program that offers telephone consultations to ERA members. You can reach Stan Herzog at 847-405-0400 or fax him at 847-405-0405, or e-mail him at herzog@theahagroup.com.

You have to say this for members of Congress - they keep thinking. Unfortunately, they appear to think about changing things that don't need changing - like the tax law. This is because the really important things that do need changing (immigration, global warming, Iraq, balancing the budget), things that require REAL thinking, are apparently beyond their capabilities ... which is an introduction to the first 2007 tax law.

The section of the tax law that most affects the public is a provision to raise tax revenue by increasing the age of dependents whose tax on investment income must be paid at their parents' tax rate. Just last year Congress increased the age from 14 to 18, for the year 2007. Congress has now raised that age to 24 for the years 2008 and beyond. In other words, children's investment income will be taxed at their parents' tax rate until they reach age 24 if still in school. There is an exception. If more than half of the dependent's support is income earned by the dependent, the umbilical cord to the parent's tax rate is severed. Many parents have tried to ease tuition by putting money aside in the names of their children in order to obtain a lower tax rate and increase the money available for college tuition. This will no longer be helpful UNLESS W-2 wages over the summer, holidays and other vacation periods can be earned in sufficient amounts to provide the child with income greater than their investments plus other sources of income.

Husband and wife partnerships and LLCs can now elect to file a joint Schedule C with their personal return and no longer have to file a partnership return. This will save the cost of preparing a partnership return. Of course, throughout history, the IRS has always preferred to audit personal returns rather than partnerships, so the IRS will welcome this change, even if taxpayers may not be so sure. Further, the spouse as a co-owner of the business is not often the wisest choice of venue. But, for the first time, Schedule C is available for spousal joint ventures if you want it.

Congress not only extended the ability of small corporations to elect the first year write-off of equipment and furniture, but it actually expanded it. The extension of Section 179 is through the year 2010. This very popular law is going to be difficult to ever be dispensed with. The amount that can be written off in the year of purchase has been increased to $125,000 (was $120,000). The law has a limitation on the amount of dollars that can be spent on equipment, in order to keep this as a "small-business" benefit. The maximum amount was $400,000; it has now been increased to $500,000. After that, the $125,000 amount is decreased dollar for dollar by the excess of purchases over that $500,000 figure; thus there is no first-year write-off if equipment purchases exceed $625,000. This section has now been indexed to inflation.

There has been hand-wringing for years about a section in the retirement plan law that prevents employees from taking distributions from their plan while they are still working. Some employees retired before they wanted to in order to collect both Social Security and their retirement plan distributions. It has been extremely vexing in a way, because company owners HAVE to receive distributions from their plans once they reached age 70.5. The new law corrects this situation by allowing vested employees staying beyond plan retirement age to ELECT to withdraw funds from their plan even while still working.

A clunker in this tax law is the increase in penalties for tax preparers. To take a deduction on a return, the preparer will hereafter have to have a "reasonable belief" that a tax position will stand. In IRS speak, that means a more-than-50 percent likelihood of success upon audit. Congress inserted this clause even though the IRS never asked for it. To make sure that the practitioners realized they were serious, Congress quadrupled the penalties. Meanwhile, individuals are not held to such a high standard. This could be interpreted as a first move toward making tax preparers an agent of the government instead of the taxpayer.

As a final note, a little-remembered section of a prior law will allow taxpayers in the 15-percent bracket to pay NO taxes on long-term capital gains beginning in 2008. See? There are benefits to poverty!

top

2007 Electronics Representatives Association (ERA), Chicago, IL 60611
Originally printed in the Fall 2007 issue of The Representor
Cannot be reprinted without the permission of the Electronics Representatives Association (ERA)