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S CORPORATIONS AND THE WAR EFFORT

May 25, 2007

Congress last night finally passed the war funding bill. Apparently a higher minimum wage, increased business expensing and S corporation banks all are a critical part of the war effort, as they all showed up in the final bill. From our skewed tax viewpoint, here are the high points:

- Effective this year, the maximum Section 179 deduction is increased by $25,000, to $125,000, for taxpayers who purchase up to $500,000 of qualifying property. The Section 179 deduction lets you write off fixed assets you would otherwise have to depreciate over several years. This is effective this year for calendar year taxpayers.

- Restricted bank directors shares will not be treated as outstanding stock under S corporation rules. This means bank directors required to hold shares under banking laws don't have to pick up K-1 income from the bank or sign S corporation elections. Any distributions on such shares will be deductible by the bank and includible in the directors income. This is effective starting January 1, 2007.

- Electing banks will be able to elect to include their entire bad debt reserve in income in their last C corporation year. Banks making an S corporation election are required to take their bad debt reserves into income. This election will enable such banks to avoid built-in gains tax on their reserve recapture. This is effective for 2007.

- Capital gains from stock or securities are no longer "passive investment income" for the special corporate-level tax on S corporations that still have C corporation earnings and profits.

And here are some low points:

- The "kiddie tax" will now apply to a lot of legal drinkers. Dependents will pay tax at their parents rates on investment income until they are 18 - or to full-time students up to age 23, starting in 2008. Couldn't they just lower the drinking age instead?

- Certain big corporations will have to pay 114.25 percent of the tax due for the third quarter of 2012 as estimated tax payments to avoid penalties.

There are also provisions that enhance employment tax credits, as well as increases in penalties for preparers and for claiming bogus refunds.

So maybe this mix of tax provisions is just the right formula for victory in the war. Who needs troops when you can just increase the corporate estimated tax requirements for 2012?

Link: Text of H.R. 2206 (pdf format).

UPDATE: The TaxProf has a roundup.

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