Small Business Taxes & ManagementTM--Copyright 2010, A/N Group, Inc.
President Obama signed the Hiring Incentives to Restore Employment Act (HIRE) into law on March 18. There are only a few provisions that directly affect small business owners and individuals.
There are two provisions here, and they are interrelated. The first is payroll tax forgiveness and the second is the worker retention credit.
Payroll tax Forgiveness--In general. The new law provides relief from the employer share of OASDI taxes on wages paid by a qualified employer with respect to certain employment. The provision applies to wages paid beginning on the day after enactment and ending on December 31, 2010. Covered employment is limited to service performed by a qualified individual: (1) in a trade or business of a qualified employer; or (2) in furtherance of the activities related to the purpose or function constituting the basis of the employer's exemption under sec. 501 (in the case of a qualified employer that is exempt from tax under sec. 501(a)).
Qualified employer. A qualified employer is any employer other than the United States, any State, any local government, or any instrumentality of the foregoing. Notwithstanding the forgoing, a qualified employer includes any employer that is a public higher education institution.
Qualified individual. A qualified individual is any individual who: (1) begins work for a qualified employer after February 3, 2010 and before January 1, 2011; (2) certifies by signed affidavit (under penalties of perjury) that he or she was employed for a total of 40 hours or less during the 60-day period ending on the date such employment begins; (3) is not employed to replace another employee of the employer unless such employee separated from employment voluntarily or for cause; and (4) is not a related party (as defined under rules similar to Sec. 51(i)) of the employer) In general, a related party is a person who is related directly or indirectly, to a more than 50% owner of a corporation or to a person owning more than a 50% capital and profits interest in a noncorporate employer.
Employer election and coordination with work opportunity tax credit. A qualified employer may elect to not have payroll tax forgiveness apply. Under the provision, a qualified employer may not receive the work opportunity tax credit on any wages paid to a qualified individual during the one-year period beginning on the hiring date of such individual, if those wages qualify the employer for payroll tax forgiveness under this provision unless the employer makes an election not to have payroll tax forgiveness apply with respect to that individual.
Effective date. The provision applies to wages paid after the date of enactment.
How it works. The IRS is revising the payroll tax forms (e.g. Form 941) to reflect the change in the law. In addition, the IRS is developing a form for employers to use to provide for the required certification. The employer will claim the employment tax benefit on the revised Form 941 (or other employment form). There is no direct reduction in the employer's share of FICA for the first quarter, because the revised forms will not be available. The first quarter amount will be applied to the amount due for the second quarter.
Example--Madison Inc. hires Fred Flood, a qualified new hire, on March 1, 2010. Fred qualifies for the entire month (he was hired after February 3, 2010), but only his wages after March 18th qualify for the forgiveness. His post-March 18th wages are $3,000. Madison's share of the OASDI portion of payroll taxes would be $186 ($3000 X 0.062). That amount can be used to reduce Madison's liability in the second quarter. In future quarters it will directly reduce Madison's payroll tax liability. Note. You must still withhold and pay over the employee's share.
Tax Tip--The rules are generally pretty straightforward. The two cautions are that the employee can't replace another employee unless that employee was fired for cause or quit and that the hired employee can't be related to the employer. Often, that's obvious. For example, Susan owns 75% of Madison Inc. Her son would not be qualified. Neither would her niece or nephew. If in doubt, check with your tax advisor.
Tax Tip--You can't claim both the hiring and retention credits and the work opportunity credit on the same employee. You'll have to work through the numbers to see which way you come out ahead.Worker retention credit. The new law also provides a general business credit for each retained worker that satisfies a minimum employment period. The credit is equal to the lesser of $1,000 or 6.2% of the retained worker's wages during a 52-week consecutive period. Generally, a retained worker is an individual who is a qualified individual as defined under the payroll tax forgiveness provision, above (new Code Sec. 3111(d)). However, the credit is available only with respect to such an individual, if the individual: (1) is employed by the employer on any date during the taxable year; (2) continues to be employed by the employer for a period of not less than 52 consecutive weeks; and (3) receives wages for such employment during the last 26 weeks of such period that are least 80-percent of such wages during the first 26 weeks of such period.
Tax Tip--An employee will reach the maximum credit of $1,000 when his wages for the qualifying period reach $16,129 ($1,000/0.062). That translates into an amount near the annual minimum wage.The portion of the general business credit attributable to the retention credit may not be carried back to a taxable year that begins prior to the date of enactment of this provision. The provision is effective for taxable years ending after March 18, 2009.
Section 179 Expensing Limit
The new law extends the Section 179 expensing limit of $250,000 and an investment limit of $800,000 (after which phaseout begins, dollar for dollar) through December 31, 2010. These limits expired at the end of 2009 and would have reduced the deduction to $134,000. Computer software continues to qualify for the expense option.
Tax Tip--Without additional tax legislation, the expense amount decreases to $25,000 for the year 2011. That limit would apply to both current year deductions and carryovers. If your deduction is limited because of your income in 2010, you could be carrying a large deduction forward for some years.
Qualified Tax Credit Bonds
For bonds originally issued after the date of enactment, the new law allows an issuer of New CREBS, QECs, QZABs, or QSCBs to make an irrevocable election on or before the issue date of such bonds to receive a payment under section 6431 in lieu of providing a tax credit to the holder of the bonds. The payment to the issuer on each payment date is equal to (1) in the case of a bond issued by a qualified small issuer, 65 percent of the amount of interest payable on such bond by such issuer with respect to such date, and (2) in the case of a bond issued by any other person, 45 percent of the amount of interest payable on such bond by such issuer with respect to such date. Thus, the amount of the payment to the issuer is a function of the market determined interest rate on the bond and not a rate set by the Secretary. For purposes of the provision, a "qualified small issuer" means, with respect to any calendar year, any issuer that is not reasonably expected to issue tax-exempt bonds (other than private activity bonds), New CREBS, QECs, QZABs, and QSCBs during such calendar year that have an aggregate face amount exceeding $30 million. Bonds for which the election is made count against the national limitation in the same way that they would if no election were made. Interest paid to the holder of the bond is includible in the holder's gross income. The payment made to the issuer under section 6431 is not includible in the issuer's income, and the issuer's deduction for interest paid on the bond is reduced by the amount paid to the issuer under section 6431.
Foreign Accounts, Trusts, etc.
In general. In general. Under the Bank Secrecy Act taxpayers have to report an interest in a foreign bank account if they have a financial interest or signatory authority over an account where the value of the account exceeds $10,000 at any time during the year. The new law imposes a number of additional requirements for reporting and disclosure. The three discussed below are the most likely to be encountered by individuals and small business owners.
Disclosure of information with respect to foreign financial assets. The provision requires individual taxpayers with an interest in a "specified foreign financial asset" during the taxable year to attach a disclosure statement to their income tax return for any year in which the aggregate value of all such assets is greater than $50,000. Although the nature of the information required is similar to the information disclosed on an FBAR, it is not identical. For example, a beneficiary of a foreign trust who is not within the scope of the FBAR reporting requirements because his interest in the trust is less than 50 percent may nonetheless be required to disclose the interest in the trust with his tax return under this provision if the value of his interest in the trust together with the value of other specified foreign financial assets exceeds the aggregate value threshold. Nothing in this provision is intended as a substitute for compliance with the FBAR reporting requirements, which are unchanged by this provision.
"Specified foreign financial assets" are depository or custodial accounts at foreign financial institutions and, to the extent not held in an account at a financial institution, (1) stocks or securities issued by foreign persons, (2) any other financial instrument or contract held for investment that is issued by or has a counterparty that is not a U.S. person, and (3) any interest in a foreign entity. The information to be included on the statement includes identifying information for each asset and its maximum value during the taxable year. For an account, the name and address of the institution at which the account is maintained and the account number are required. For a stock or security, the name and address of the issuer, and any other information necessary to identify the stock or security and terms of its issuance must be provided. For all other instruments or contracts, or interests in foreign entities, the information necessary to identify the nature of the instrument, contract or interest must be provided, along with the names and addresses of all foreign issuers and counterparties. An individual is not required under this provision to disclose interests that are held in a custodial account with a U.S. financial institution nor is an individual required to identify separately any stock, security instrument, contract, or interest in a foreign financial account disclosed under the provision. In addition, the provision permits the Secretary to issue regulations that would apply the reporting obligations to a domestic entity in the same manner as if such entity were an individual if that domestic entity is formed or availed of to hold such interests, directly or indirectly.
Individuals who fail to make the required disclosures are subject to a penalty of $10,000 for the taxable year. An additional penalty may apply if the Secretary notifies an individual by mail of the failure to disclose and the failure to disclose continues. If the failure continues beyond 90 days following the mailing, the penalty increases by $10,000 for each 30 day period (or a fraction thereof), up to a maximum penalty of $50,000 for one taxable period. The computation of the penalty is similar to that applicable to failures to file reports with respect to certain foreign corporations under section 6038. Thus, an individual who is notified of his failure to disclose with respect to a single taxable year under this provision and who takes remedial action on the 95th day after such notice is mailed incurs a penalty of $20,000 comprising the base amount of $10,000, plus $10,000 for the fraction (i.e., the five days) of a 30-day period following the lapse of 90 days after the notice of noncompliance was mailed. An individual who postpones remedial action until the 181st day is subject to the maximum penalty of $50,000: the base amount of $10,000, plus $30,000 for the three 30-day periods, plus $10,000 for the one fraction (i.e., the single day) of a 30-day period following the lapse of 90 days after the notice of noncompliance was mailed.
No penalty is imposed under the provision against an individual who can establish that the failure was due to reasonable cause and not willful neglect. Foreign law prohibitions against disclosure of the required information cannot be relied upon to establish reasonable cause.
Penalties for underpayments attributable to undisclosed foreign financial assets. The provision adds a new accuracy related penalty to section 6662. The new provision, which is subject to the same defenses as are otherwise available under section 6662, imposes a 40-percent penalty on any understatement attributable to an undisclosed foreign financial asset. The term "undisclosed foreign financial asset" includes all assets subject to certain information reporting requirements for which the required information was not provided by the taxpayer as required under the applicable reporting provisions. An understatement is attributable to an undisclosed foreign financial asset if it is attributable to any transaction involving such asset. Thus, a U.S. person who fails to comply with the various self-reporting requirements for a foreign financial asset and engages in a transaction with respect to that asset incurs a penalty on any resulting underpayment that is double the otherwise applicable penalty for substantial understatements or negligence. For example, if a taxpayer fails to disclose amounts held in a foreign financial account, any underpayment of tax related to the transaction that gave rise to the income would be subject to the penalty provision, as would any underpayment related to interest, dividends or other returns accrued on such undisclosed amounts.
Modification of statute of limitations for significant omission of income in connection with foreign assets. The provision authorizes a new six-year limitations period for assessment of tax on understatements of income attributable to foreign financial assets. The present exception that provides a six-year period for substantial omission of an amount equal to 25 percent of the gross income reported on the return is not changed.
The new exception applies if there is an omission of gross income in excess of $5,000 and the omitted gross income is attributable to an asset with respect to which information reports are required under section 6038D, as applied without regard to the dollar threshold, the statutory exception for nonresident aliens and any exceptions provided by regulation. If a domestic entity is formed or availed of to hold foreign financial assets and is subject to the reporting requirements of section 6038D in the same manner as an individual, the six-year limitations period may also apply to that entity. The Secretary is permitted to assess the resulting deficiency at any time within six years of the filing of the income tax return.
Copyright 2010 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536
--Last Update 03/31/10