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Washington Tax Alert January 20, 2007 (pending tax legislation)

Washington Tax Alert from Don Barnes, dbarnes@washingtontaxlaw.com
January 20, 2007

On January 17, 2007, the Senate Finance Committee approved the Small Business and Work Opportunity Act of 2007. This bill provides $8 billion in tax incentives for businesses in connection with a proposed increase in the minimum wage. The bill also includes a number of revenue raisers that offset the cost of the tax incentives.

If this bill were enacted into law, several provisions would affect closely held businesses. The most important changes are:

  • The current law provision allowing 15-year MACRS depreciation for improvements to restaurant buildings would be liberalized to include improvements made within 3 years of the building being placed in service.

  • A new 15-year MACRS recovery period would be created for improvements to the interior of a building used in the retail trade of selling goods to the public, provided the improvements are made more than 3 years after the building is first placed in service. This new depreciation rule would be available for all retail buildings (grocery stores, clothing stores, hardware stores, convenience stores, etc.).

  • Eligibility to use the cash method of accounting would be expanded to include all taxpayers with average annual gross receipts of $10 million or less, regardless of whether the taxpayer has inventory. This is a significant change in long-standing tax rules. The $10 million ceiling would be indexed for inflation beginning in taxable years after 2008.

  • Restricted bank director stock would not be treated as outstanding stock for purposes of the S corporation and QSub rules.

  • There would be a change in the tax treatment of transactions where S corporations dispose of stock in a QSub. Under the Senate bill, the disposition of stock in the QSub would be treated as a disposition of an undivided interest in the assets of the QSub based on the percentage of stock disposed of, followed by a deemed transfer of all the assets of the QSub to a new corporation in a transaction to which IRC § 351 applies.

  • Electing small business trusts that are shareholders of an S corporation would be permitted to have a nonresident alien as a beneficiary.

  • Clarification of the employment tax rules with regard to employee leasing companies.

  • Denial of deductions for punitive damages and certain fines and penalties, including amounts paid in settlement of claims to avoid litigation.

  • Limits on annual deferrals under nonqualified deferred compensation plans.

  • Doubling of penalties, interest and fines relating to the use of certain offshore financial arrangements by taxpayers, including the use of offshore credit cards and securities trading accounts with offshore banks.