2007 is shaping up to be a busy year for federal tax legislation during which taxpayers must keep informed and be prepared to immediately take advantage of new or expanded tax benefits. You also need to be attentive to a growing list of "revenue raisers" being proposed to pay for some of these tax cuts. The adage, "Congress giveth and Congress taketh away" is especially apropos to describe this year's balanced-budget activities on Capitol Hill.

After just one month of work, the new 110th Congress is set to raise the federal minimum wage; but the big question is whether it will give small businesses some tax breaks to help absorb the cost of higher wages. Democrats in the House want a "clean" minimum wage bill, raising the minimum wage to $7.25 over two years. In the Senate, where Democrats have a very narrow majority, many lawmakers support adding business tax breaks to the minimum wage bill.  At press time, the outcome is still uncertain. If the small business tax breaks don't make it into the minimum wage package, however, the pressure will continue to insert those provisions in other pending tax bills.

Additionally, the House has also repealed some energy tax breaks and President Bush has proposed tax reforms to expand health insurance coverage. Two powerful tax writing committees, the House Ways and Means Committee and the Senate Finance Committee, are getting down to work and a slew of other tax bills have been introduced in Congress.

Small business incentives

The small business tax incentives being debated in Congress are familiar from past tax laws. Many would extend or expand existing tax breaks. While many are popular with Democrats and Republicans, they may not survive intense pressure from Democratic leaders to send a clean minimum wage bill to President Bush.

Let's take a look at some of the proposals in Congress targeted to small businesses:

Enhanced small business expensing. Taxpayers may expense $100,000 (adjusted for inflation) the cost of qualifying property placed in service for the tax year. The $100,000 amount (adjusted for inflation) is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the tax year exceeds $400,000 (adjusted for inflation). For tax years beginning in 2007, the inflation amounts are $112,000 and $450,000 respectively. Many lawmakers want to extend the higher amounts through 2010.

WOTC.  The Work Opportunity Tax Credit (WOTC) rewards employers for hiring economically disadvantaged individuals. The Senate is considering expanding the credit to encompass more veterans and high-risk young people and extend the credit for five years, through January 1, 2013.

Retail improvements.  Under current law, only improvements made to leased stores may be depreciated over 15 years. Many lawmakers want to extend this special treatment to owned stores.

Cash method of accounting.  Another proposal in the Senate would permanently increase the exception for qualifying C corps to use the cash method of accounting from $5 to $10 million. The threshold would also be indexed for inflation.

Professional employer organizations.  Lawmakers are also considering certifying professional employer organizations. Certified professional employer organizations would have to accept sole responsibility for collecting federal employment taxes on individuals performing services for their clients.

S corporations. Several proposals in the Senate would impact S corporations. These include eliminating gains from sales or exchanges of stock or securities as an item of passive investment income.  S corporation proposals also address the treatment of bank director shares, the treatment of banks changing from the reserve method of accounting and the treatment of disposition of an interest in a qualified Subchapter S subsidiary. Some lawmakers support allowing nonresident aliens to become qualified beneficiaries of an electing small business trust that owns S corporation stock.

Revenue raisers

Because Democrats have promised to abide by PAYGO - offsetting new tax cuts with revenue raisers elsewhere - any extensions or enhancements to small business tax breaks must be offset.

Some possible offsets include:

• Limiting deferred compensation to the lesser of $1 million or the average taxable compensation for the previous five years.
• Disallowing losses for Sale-In/Lease-Out (SILO) transactions entered into on or before March 12, 2004.
• Imposing tougher restrictions on corporate inversions.
• Denying a deduction for punitive damages paid or incurred as a result of a judgment or in settlement of a claim.
• Denying a deduction for certain fines and penalties.
• Imposing a mark-to-market on expatriating individuals.
• Increasing tax evasion and failure-to-file penalties.
• Doubling fines and penalties for underpayments related to offshore financial arrangements;
• Increasing bad check penalties.
• Modifying the treatment of contingent payment convertible debt instruments;
• Extending IRS user fees.
• Excluding levies to collect unemployment taxes from collection due process (CDP) hearings;
• Extending whistleblower reforms.
• Modifying the definition of covered employee.

Rollback of energy tax breaks

The House has voted to exclude oil and gas companies from claiming the domestic production activities deduction under Code Sec. 199 and to roll back some tax incentives for geological studies on oil exploration. The oil and gas industry is fighting these cuts in the Senate, especially the denial of the Code Sec. 199 deduction, arguing that it is unfair to deny the deduction to one industry.

President's health care proposals

President Bush described his health insurance proposals during his State of the Union address on January 23rd, 2007. Families who purchase health insurance would qualify for an automatic, above-the-line deduction of $15,000.  Individuals purchasing single policies would not pay income or payroll taxes on the first $7,500 in compensation. However, in a major change, health insurance would be considered taxable income. Democrats have criticized President Bush's proposal, saying it is tantamount to a tax increase for middle-income taxpayers.

House and Senate tax committees have busy agendas

The House Ways and Means Committee is expected to be very active in tax legislation during 2007. The committee is exploring holding hearings on tax incentives to increase home ownership, health savings accounts and energy tax breaks. The committee will also examine IRS operations, including how well the agency is enforcing the tax laws and how effective its collection activities are.

The leaders of the Senate Finance Committee, which oversees all tax legislation in the Senate, have proposed abolishing the individual alternative minimum tax. This proposal is popular but very costly, and under the PAYGO rules, Congress would have to find a way to offset the billions of dollars the AMT raises. The Senate Finance Committee also is expected to investigate how to close the tax gap - the difference between what taxpayers owe and what they actually pay.

More tax bills

Additional tax bills have been introduced in Congress, including proposals to:

• Repeal the federal telephone excise tax on local service.
• Develop a simplified income tax return for senior citizens.
• Deny tax benefits to companies doing business in Sudan.
• Stop the outsourcing of federal tax collection.
• Create a tax break for physical fitness programs.
• Enhance education tax breaks for individuals studying computer and information science.
• Create a commission to develop tax and entitlement reform bills