Washington Tax Alert April 26, 2007 (tax legislation)

Washington Tax Alert from Don Barnes, [email protected]

April 26, 2007

It is expected that Congress will pass Iraq war funding legislation this week, which includes an increase in the minimum wage and certain tax provisions. Although this bill is expected to be vetoed by President Bush, the Democratic leadership indicates that the tax provisions in the bill are not open to revision when the vetoed bill is reconsidered by Congress.

The proposed tax provisions in the current bill are more limited than the tax provisions described in / , Washington Tax Alert dated January 20, 2007. However, the bill includes an increase in IRC § 179 expensing to $125,000, and several modifications to the S corporation rules.

Additional items of interest to CPA firms and their clients include the following:

  • The kiddie tax is expanded to include children 18 years old and full-time college students up through age 23. However, this provision will not become effective until 2008. Therefore, the kiddie tax will not apply to 18 year olds and college students for 2007.
  • An enhanced and broader penalty on tax return preparers. Under the bill, the preparer penalty will apply to all types of tax returns (income, gift, estate, employment, excise and tax exempt). Furthermore, to avoid the penalty, a position taken by a tax preparer must be more likely than not the correct treatment if the position is not disclosed, or have a reasonable basis if the position is disclosed on the return. The revised penalty will be $1,000 or 50% of the income earned by the preparer from preparation of the return, whichever is greater.
  • A new 20% penalty for filing refund claims that lack a reasonable basis.
  • The tax treatment accorded the sale of 21% or more of the stock of a QSub will be changed. Under current law, such a sale is treated as a deemed sale of all of the QSub’s assets because the transaction does not qualify under IRC § 351. Under the bill, a percentage of the QSub’s assets will be deemed sold equal to the percentage of stock sold.