By Chris Freeburn

For small business owners, there are few headaches like trying to keep up with the ever changing landscape of tax rules. Last year, Congress and the Internal Revenue Service (IRS) made a variety of changes and adjustments to the tax code that will affect almost all businesses. While most changes are minor adjustments, mostly increases in the maximum amount of income or expenses applicable to taxes or deductions, small business owners should take the time to examine the changes in detail to make certain they take full advantage of, and comply fully with, all of the changes.



Here are some of the pertinent changes to federal tax laws applicable to small businesses for the 2007 tax year:

Self-employment Social Security Tax - For 2007, the maximum net self employment earnings subject to social security tax has increased to $97,500 (there remains no limit on income subject to Medicare tax).

Mileage Deduction - The standard mileage deduction for business vehicles has increased to 48.5 cents per mile from 44.5 cents per mile in 2006. Small business owners should also note that toll and parking expenses may also be deducted.

The AMT Lingers - Once again, Congress has sidestepped much needed reform of the Alternative Minimum Tax (AMT), by adopting a simple "patch" that raises the size of deductions for individuals, married couples and children, thus allowing the AMT to endure for yet another year. Created to snare the high income earning taxpayers who used tax credits and deductions to avoid paying virtually any federal tax, the AMT was introduced in the early 1970's. Since Congress failed to index the AMT for inflation, the AMT now threatens to hit many middle class taxpayers particularly those with incomes between $75,000 and $200,000 with additional taxes. Small business owners are particularly vulnerable because many operate their businesses as sole proprietorships or personal corporations. The AMT requires taxpayers to calculate their taxes twice, once under the normal rules and then a second time under complicated AMT rules, and then pay the higher tax. You can calculate the impact of the AMT (if any) on your 2007 taxes by using the AMT calculator at the IRS's website: http://apps.irs.gov/app/amt2007/index.jsp?ck

Employee Parking - Beginning in 2007, firms can spend up to $215 per month tax free for employee parking. The limit on tax-free bus and subway passes increases to $110 per month, up $10 from 2006.

Expense Deduction Increased - The IRS has increased the maximum deduction for business property placed in service for the business in 2007 (Section 179) from $108,000 to $125,000, though this deduction is reduced if the cost of the property exceeds $500,000. For businesses located in a qualifying enterprise zone, the deduction is increased from $143,000 to $160,000.

Husband and Wife owned Business - Married spouses who jointly own or operate a business may choose to be taxed as a joint venture if they qualify.

Domestic Production Activities Deduction - Businesses engaged in engineering, construction, film production, architecture, or the lease, sale, or rental of equipment manufactured in the U.S. can deduct up to six percent of qualifying net income from their federal taxes.

Electric Vehicle Credit - The tax credit previously offered to electric vehicles is not applicable to vehicles entering service after December 31, 2006.

Equipment Purchase Credit - Opting to purchase business equipment, including computers and machinery, instead of leasing it can result in a tax deduction. For 2007, up to $112,000 of equipment purchased for your business can be deducted as an expense, rather than being depreciated over five or seven years (or any other period established by tax law), depending on the equipment claimed for the deduction. This represents a $4,000 increase from the deduction permitted in 2006. The deduction applies to both new and previously owned (used) equipment and is applicable regardless of whether the equipment was purchased with cash, or financed in any way. However, some states have income tax regulations that mandate the depreciation of equipment purchases, which would prevent business owners from taking advantage of this deduction. Check with your state's tax office to determine whether or not your business must depreciate new equipment purchases by law in your state.

For additional information regarding business tax changes for 2007, please visit the IRS's website: http://www.irs.gov/formspubs/article/0id=10987900.html

Prior to relying on any legal, tax or financial advice or recommendations provided herein, you are advised to consult with your attorney, financial adviser and/or tax professional to verify the information provided and to determine the applicability of any federal, state or industry specific laws and/or regulations that may apply to you. Bank of America shall have no liability for legal, investment, finance and/or tax decisions based on the information provided.

Similar Content