This summer, Congress increased the minimum wage from $5.15 per hour to $7.25 per hour. While this will greatly benefit the workforce in this country, it will also increase the labor expense for all businesses, especially small businesses.
In order to help cope with the added expenses, Congress set aside approximately $4.84 billion dollars in additional tax breaks for these businesses. Below I’ve listed 3 of the main tax updates.
#1 The Work Opportunity Tax Credit (WOTC)
The Work Opportunity Tax Credit to available to businesses that hire individuals from “economically challenged” populations. This typically includes high-risk youths, ex-felons, and individuals receiving some type of public assistance.
Additionally, new in this tax update, the WOTC is extended to individuals living in “rural-renewal” counties which are counties outside metropolitan areas that had population losses in the 1990’s.
The tax credit amount that businesses can claim is calculated by taking a percentage of qualified wages incurred during the first 2 years of the qualified employees’ employment.
#2 Family Businesses
The new 2007 tax laws allow married couples who jointly operate an unincorporated business (and file a joint tax return) to elect to NOT be treated as a partnership for their business tax purposes.
The update benefits family business owners because it means both spouses get credit for paying Social Security and Medicare taxes. Thereby each spouse can take his or her share of the income/loss as a sole proprietor. This also means that a Partnership Tax Return will not have to be filed, the spouses can report their income on Form 1040 Schedule C.
#3 S Corporation Status
The new tax updates make it easier for businesses to maintain their S Corporation status. Previously, the passive-income test would force businesses to give up their S Corp. status. However, the law now no longer requires capital gains from the sale of stock or securities to be treated as passive income.
All three of these tax updates are retroactive to January 1, 2007 and provide a smart way to decrease a company’s tax burden. Therefore, business should research and consult their tax advisers for specific advice relating to their business.
Very few people use the words fun and taxes together… and don’t worry, I’m not one of them. I hope to make taxes easier to understand and less of a hassle. I am a CPA with a Master’s in Accounting, and I’ll do my best to help explain many of the tax options available today.