Daily Tax Update - January 17, 2007

SENATE FINANCE COMMITTEE PASSES SMALL BUSINESS TAX INCENTIVES PACKAGE WITH REVENUE OFFSETS: Today, the Senate Finance Committee approved an $8 billion package (Small Business and Work Opportunity Act of 2007) of tax incentives aimed at helping small businesses as the Senate considers a hike in the minimum wage. The tax package is expected to be added later to a Senate bill that would increase the federal minimum wage to $7.25 an hour over a two-year period.  The bill includes several provisions to combat tax shelters and close tax "loopholes." One of the revenue raisers would modify a provision included in the American Jobs Creation Act of 2004 (Jobs Act) that dealt with sale-in/lease-out (SILO) transactions.

  • The tax incentives include: (1) a one-year extension of a provision allowing small businesses to combine as much as $112,000 in expenses into one annual tax deduction; (2) an extension through March 31, 2008, of a provision that allows business owners to more quickly deduct the cost of making improvements to a leased property.  Also, modifications to the provision that provide retailers who make improvements to property they own and people who build new restaurant properties the same treatment renters receive under this provision; (3) a permanent change to the tax code that will allow more businesses to simplify their bookkeeping by allowing them to use the cash method of accounting for tax purposes and (4) a modification to the standards that allow small businesses to qualify for or stay within the S Corp tax rules.
  • Additional information on the bill can be accessed here.

SENATE FINANCE COMMITTEE PASSES NEW LIMITS ON NONQUALIFIED DEFERRED COMPENSATION: The Senate Finance Committee’s incentive package contains two proposals that would affect nonqualified deferred compensation arrangements.

  • The first would limit the annual deferral on behalf of an individual to nonqualified deferred compensation arrangements of an employer. That amount would be capped at $1 million or the average taxable compensation for the previous five years, whichever is lower. Deferred compensation would generally be defined in the same manner as under section 409A, so it appears that as written options issued at fair market value would be exempt under the proposal.
  • If the requirement is not satisfied, the present–law sanction for failure to satisfy section 409A would apply (i.e., current income inclusion, interest at the under-payment rate plus one percent on underpayments that would have occurred had the compensation been in income when first deferred, or if later, when not subject to a substantial risk of forfeiture, and a 20% additional tax on the amount included in income). The proposal would be effective for amounts deferred in years after 2006, although there would be some ability to modify deferral elections to comply. The proposal applies to all employers, whether public or private, taxable or tax-exempt.
  • Another proposal affects the $1 million cap on deductions under section 162(m). Currently this deduction limit affects only the compensation paid to "covered employees," very generally defined as the CEO and the four other highly compensated officers of the company as reported in the company’s proxy statement. The proposal would modify the definition of "covered employee" to include any individual who was the CEO of the company at any time during the taxable year and the four officers with the highest compensation for the year. Covered employees would also include any individuals who were previously covered employees for any preceding taxable year beginning after December 31, 2006 with respect to the corporation (and beneficiaries of such persons). This would make nonqualified deferred payments to retired covered employees subject to the deduction limits.
  • For additional information, contact - Anne E. Moran - amoran@steptoe.com, Ellen Kohnekohn@steptoe.com or Don Wellingtondwellington@steptoe.com.

TAX BILLS INTRODUCED JANUARY 16TH CAN BE ACCESSED VIA:
Click here for more information.

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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