House and Senate negotiators are expected to start negotiating a compromise small business tax relief bill in the near future.  The House and Senate have both passed bills extending and enhancing small business tax breaks – most notably Code Sec. 179 expensing and the Work Opportunity Tax Credit (WOTC) – but at very different price tags.  The House bill costs $1.3 billion; the Senate bill costs $8.3 billion.  

“Sweeteners”

The small business tax incentives are “sweeteners” to help small businesses absorb the costs of a higher federal minimum wage.  Democrats in the House and Senate have agreed to raise the minimum wage to $7.25 per hour over the next two years.  They haven’t agreed on how generous the sweeteners should be or how to pay for them.

Small business expensing 

Small business owners know that Code Sec. 179 is a very valuable tax break.  Today, the amount you can expense is at an all-time high.  The maximum Code Sec. 179 deduction, as adjusted for inflation, is $112,000 for 2007. For 2007, the investment limitation, as adjusted for inflation, is $450,000.

The House bill would immediately increase the $112,000 and $450,000 amounts to $125,000 and $500,000, index them for inflation, and extend them through 2010.  The Senate bill would also extend small business expensing but does not increase the $112,000 and $450,000 amounts.

WOTC

The House bill would extend the WOTC through 2010 and expand the credit to include disabled veterans. The bill would also increase the maximum age for designated community residents to age 40.  The Senate bill is very similar to the House bill.

Retail improvements

Under the Senate bill, grocery, clothing, hardware, and other retail stores would be able to depreciate qualified improvements over 15 years.  The Senate bill applies to leased and owned retail stores.  The House bill does not include this tax break.

FICA tip credit

Eventually, Congress will raise the minimum wage to $7.25.  However, under the House bill, the FICA tip credit would continue to be determined based on a minimum wage of $5.15 per hour.  The House bill also allows the WOTC and the credit for taxes paid with respect to employee tips to offset AMT.   The Senate bill does not include these tax breaks.

Joint ventures

The House bill would permit a qualified joint venture whose only members are a husband and wife filing a joint return not to be treated as a partnership.  Both spouses must materially participate in the business and elect to have the provision apply.  The Senate bill does not include a similar provision.

Offsets

The House and Senate are far apart on how to pay for the small business tax breaks.  The Senate favors cracking down on tax shelters, such as Sale-In/lease-Out (SILO) arrangements, and imposing penalties on corporations moving overseas for tax reasons.  In a very controversial move, the Senate bill would also limit deferred compensation to the lesser of $1 million or the average taxable compensation for the previous five years.

The House bill raises revenue for the tax breaks by denying the lowest dividend and capital gains tax rate to dependents of wealthy taxpayers. It also makes some minor adjustments to estimated tax due dates for very large corporations to shift revenue from year tax year to another.

What’s ahead?

A House-Senate conference could start as early as February 26.  Democrats, who will be in charge of the conference, are divided. 

Senate Democrats, especially Senate Finance Committee Chairman Max Baucus, D-Montana, want the anti-tax shelter and deferred compensation offsets in a final bill.  House Democrats, led by Ways and Means Committee Chairman Charles Rangel, D-N.Y., want to keep the cost of the final bill as low as possible.  However, Baucus recently and optimistically predicted that “there will be a lot of agreement before we sit down (to a conference).”

Our office will monitor the progress of this important legislation and keep you posted.  If you have any questions about the tax cuts, don’t hesitate to give us a call.

(HR 976, HR 2 (Sen 349))