Beware the Small Business and Work Opportunity Act of 2007

OK - this one isn't law yet. It's a bill pending in the Senate introduced on 1/22/07.

One (of a host of items)  basic effect, if passed, will be to cap annual non-qualified income tax deferral to the lesser of (i) average of last 5 years compensation or (ii) $1 Million. Yes, there is a provision adjusting in the case where there is not 5 years of compensation.

This will set the hedge fund manager world on its ear if passed. Successful hedge fund managers who are generally sufficiently well advised to navigate the infamous Sec. 409A of the Internal Revenue Code - another nightmare of tax complexity - are accustomed to deferring way, way over $1 M per year. So this bill is not going to make them happy campers - if it becomes law.

The slated effective date is now (i.e. for tax years beginning in 2007). Folks who've overcooked their 2007 deferral election will apparently be allowed to remedy it down to the mere $1 M.

So us legal types will be keeping our eye on it. Currently the bill (S. 349) is on the Senate legislative calendar. The rumor mill says that this one has "legs". We shall see.