Changes for the tax year 2007 offer some minor, but favorable relief to small business owners. Even though 2007 tax changes are not significant, it is still advisable to have a tax professional prepare your return. Choose a service that will accompany you, or provide an explanation of how your taxes were prepared, in the event that you are audited by the IRS.
Filing an accurate tax return is important, but it is no guarantee will never be audited. Be sure to retain receipts for all business expenses – no matter how trivial the expense may seem. Receipts should be organized and filed in a way that you can easily access them for auditing purposes.
Audit Tip: Maintaining accurate accounting records and financial reports is important. But if you are audited by the IRS, you still need to be able to produce the actual receipts.
New Tax Options in 2007 for Husband-and-Wife Small Businesses
Prior to 2007, small businesses that are jointly owned by a husband and wife, had to file as a partnership. Beginning in tax year 2007, spouses of qualified jointly-owned businesses can report their share of earnings or losses from the venture individually, without having to file a partnership return.
Alternative Minimum Tax Exemption Increases for 2007
The Alternative Minimum Tax (AMT) is an extra tax that is paid in addition to regular income tax. AMT uses an “Alternative” set of rules to calculate income tax and determine the “Minimum” amount of tax that someone with your income should pay. If you have a lot of deductions in proportion to your income, you may have to pay an AMT.
For tax year 2007, the alternative minimum tax exemption is now:
- $66,250 for a married couple filing a joint return (an increase from $62,550 in 2006).
- $33,125 for a married person filing separately (an increase from $31,275 in 2006).
- $44,350 for single persons and heads of households (an increased from $42,500 in 2006).
If you are required to file for AMT, be aware that many small business owners are taxed on personal income as self-employed workers.
Changes in Self-Employment Tax for 2007
Federal Insurance Contributions Act (FICA) tax is a mandatory federal tax for both employees and employers. FICA helps fund social security and Medicare programs.
The maximum amount of net earnings subject to the FICA portion of the self-employment tax beginning in 2007 has increased to $97,500.
As of 2007, all net earnings of at least $400 are subject to the Medicare part of the tax.
Tax Tip: Workers under of 18 are not subject to FICA if they earn less than $5,350 annually, and what you pay to them is fully deductible.
Social Security and Medicare Tax Changes for 2007
The maximum amount of wages subject to the social security tax for 2007 is $97,500. There is no limit on the amount of wages subject to the Medicare tax.
Increase in Deductions for Use of Your Vehicle
If you use your car, van, pickup truck, or panel truck for business use, you can now deduct 48.5 cents per mile (the 2006 deduction rate was 44.5 cents).
To take the “standard mileage rate” deduction for business use of your vehicle, you must keep accurate records. Be sure to record the date, time, purpose of the trip, destination, and beginning and ending mileage. If you ever get audited, the IRS is very picky about accurate records for mileage deductions.
Note: The standard mileage rate (SMR) deduction for using your vehicle for charity (volunteer work)is only 14 cents per mile. The SMR is 20 cents per mile for moving, and travel for medical care. These expenses should be recorded on personal tax returns, not on business tax returns.
Sources:
Department of the Treasury; Internal Revenue Service. “Tax Law Changes for Individuals.” April 5, 2008.
Department of the Treasury; Internal Revenue Service. “Tax Law Changes for Businesses.” April 5, 2008
