IRS News Release IR-2010-69 reminds taxpayers of several recent tax incentives for small business

Pretty self-explanatory, but worth reviewing in case your business might be able to take advantage of one or more of these incentives.  Original release at http://bit.ly/bAEW2J

Recent Legislation Offers Special Tax Incentives for Small Businesses to Provide Health Care, Hire New Workers


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HIRE Act: English
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IR-2010-69, May 28, 2010


WASHINGTON — In recognition of National Small Business Week, the Internal Revenue Service encourages small businesses to take advantage of tax-saving opportunities included in recently enacted federal legislation.


A variety of business tax deductions and credits were created, extended and expanded by the American Recovery and Reinvestment Act of 2009 (ARRA), this year’s Hiring Incentives to Restore Employment (HIRE) Act and the Affordable Care Act. Because some of these changes are only available this year, eligible businesses only have a few months to take action and save on their taxes. Here is a rundown of some of the key provisions.


New Health Care Tax Credit Helps Small Employers


The small business health care tax credit, created under the Affordable Care Act, is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have.


The credit takes effect this year and is generally available to small employers that pay at least half the cost of single coverage for their employees in 2010. The credit is specifically targeted to help small employers that primarily employ low- and moderate-income workers.


For tax years 2010 to 2013, the maximum credit is 35 percent of premiums paid by eligible small business employers. The maximum credit goes to smaller employers ­­–– those with 10 or fewer full-time equivalent (FTE) employees ––­­ paying annual average wages of $25,000 or less. The credit is completely phased out for employers with more than 25 FTEs or with average wages of more than $50,000.


Because the eligibility rules are based in part on the number of FTEs, not the number of employees, businesses that use part-time help may qualify even if they employ more than 25 individuals. More information about the credit, including a step-by-step guide and answers to frequently asked questions, is available on the IRS website.


Two New Benefits for Employers that Hire and Retain Recently Unemployed


Employers who hire unemployed workers this year (after Feb. 3, 2010, and before Jan. 1, 2011) may qualify for a 6.2-percent payroll tax incentive, in effect exempting them from the employer’s share of Social Security tax on wages paid to these workers after March 18. In addition, for each qualified employee retained for at least a year whose wages did not significantly decrease in the second half of the year, businesses may claim a new hire retention credit of up to $1,000 per worker on their income tax return.


These tax benefits are especially helpful to employers who are adding positions to their payrolls. New hires filling existing positions also qualify but only if the workers they are replacing left voluntarily or for cause. Family members and other relatives generally do not qualify.


Employers must get a signed statement from each eligible new hire, certifying under penalties of perjury, that he or she was not employed for more than 40 hours during the 60 days before beginning employment with that employer. IRS Form W-11 can be used to meet this requirement. Further details, including answers to frequently asked questions, are posted on IRS.gov.


Work Opportunity Tax Credit Aids Employers That Hire Certain Workers


The work opportunity tax credit (WOTC) offers tax savings to businesses that hire employees belonging to various targeted groups. These groups include people ages 18 to 39 living in designated communities in 43 states and the District of Columbia, recipients of various types of public assistance, certain veterans, ex-felons and certain youth workers. The instructions for Form 8850 detail the requirements for each of these groups.


Certification by the state workforce agency is generally required. Normally, a business must file Form 8850 with the state workforce agency within 28 days after the eligible worker begins work.


An eligible employer can claim both the WOTC and the new hire retention credit for the same employee. However, an employer may not claim both the payroll tax exemption and the WOTC for the same employee. Therefore, any employer that chooses to apply the exemption to wages paid to a qualified employee may not receive the WOTC on any wages paid to that employee during the one-year period beginning on the employee’s hiring date.


Exclusion of Gain on the Sale of Certain Small Business Stock


An extra incentive is now available to individuals who invest in small businesses. Investors in qualified small business stock can exclude 75 percent of the gain upon sale of the stock. This increased exclusion applies only if the qualified small business stock is acquired after Feb. 17, 2009, and before Jan. 1, 2011, and held for more than five years. For previously-acquired stock, the exclusion rate remains at 50 percent in most cases.


COBRA Credit


Employers that provide the 65 percent COBRA premium subsidy to eligible former employees can claim credit for this subsidy on their quarterly or annual payroll tax returns. To help avoid imposing an unnecessary cash-flow burden, affected employers can reduce their payroll tax deposits by the amount of the credit. For details, see the instructions for Form 941.


Small business owners can find a variety of helpful on-line resources in the Small Business and Self-Employed Tax Center on IRS.gov.

IRS Posts Employer Q&A re Tax Benefits for Certain Employers

Following the recent enactment of the HIRE Act, the IRS has posted on its website [http://bit.ly/aM1xzo] a set of questions and answers for employers that stand to benefit from some of the Act's new provisions by hiring certain qualified employees. The introductory text reads as follows, and is accompanied by links to IRS Q&As, News releases related to the HIRE Act, and References/Related Topics.

"Under the Hiring Incentives to Restore Employment (HIRE) Act, enacted March 18, 2010, two new tax benefits are available to employers who hire certain previously unemployed workers (“qualified employees”).

The first, referred to as the payroll tax exemption, provides employers with an exemption from the employer’s 6.2 percent share of social security tax on wages paid to qualifying employees, effective for wages paid from March 19, 2010 through December 31, 2010.

In addition, for each qualified employee retained for at least 52 consecutive weeks, businesses will also be eligible for a general business tax credit, referred to as the new hire retention credit, of 6.2 percent of wages paid to the qualified employee over the 52 week period, up to a maximum credit of $1,000."

Well worth a visit.

The Jobs Bill (aka the Health Care bill's quiet sibling)

With all the focus on Health Care legislation, not everyone got the message that on March 18, 2010, President Obama signed into law the Hiring Incentives to Restore Employment Act ("HIRE"). While intended to spur job growth via tax breaks to businesses that add employees and invest in equipment, it also (among other things) imposes new disclosure requirements related to foreign investments. An overview of the more widely-applicable provisions follows. For more detailed information (and we do mean detailed), readers can refer to these official sources:

• The text of H.R. 2847 [http://hdl.loc.gov/loc.uscongress/legislation.111hr4872]
• The Joint Committee on Taxation's technical explanation [http://www.jct.gov/publications.html?func=startdown&id=3648]

Hiring and Retention Incentives

• Payroll Tax Forgiveness for Hiring Unemployed Workers - Eliminates the employer's share of OASDI paid by a qualified employer attributable to wages paid to a qualified individual (starting with the date immediately after enactment, i.e., 3/19/10) through 12/31/10, subject to minor adjustment for wages paid through 3/31/10.
• "OASDI" is the old age, survivors, and disability insurance tax equal to 6.2% of covered wages up to the taxable wage base ($106,800 in 2010), providing a maximum potential benefit to the employer of approximately $6,600.
• A qualified employer is any non-governmental employer (but does include public higher education institutions).
•  A qualified individual is anyone who (1) begins work for a qualified employer after 2/3/10 and before 1/1/11; (2) certifies by signed affidavit 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 began; (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 with respect to the employer.
  
• Coordination with the Work Opportunity Tax Credit ("WOTC") - Qualified employers may not receive the WOTC with respect to wages paid to a qualified individual during the 1-year period starting with the employee's hire date if such wages qualify under this provision unless the employer expressly elects to forgo the benefits of this provision for that person.

• Business Credit for Retention of Certain Newly Hired Individuals in 2010 - Provides a general business tax credit for each retained "qualified invididual" (as defined above) who (1) is employed on any date during the taxable year; (2) remains employed for a period of not less than 52 consecutive weeks; and (3) receives wages during the last 26 weeks of such period that are least 80% of the wages received during the first 26 weeks of that period. The amount of this credit is the lesser of
• $1,000 or
• 6.2% of the wages paid by the taxpayer to the retained worker during the 52 consecutive week period referred to above.
• The retention credit may not be carried back to a taxable year that begins prior to the date of enactment of this provision.
• This provision is effective from the date of enactment (i.e., 3/18/10).

Section 179 Expensing

• Extends for one year the $250,000 maximum section 179 deduction (and the $800,000 phaseout limit) that would otherwise have dropped to $125,000 (and $500,000) in the absence of this legislation.
• This provision is effective for taxable years beginning after 12/31/09.

Qualified Tax Credit Bonds

• Permits tax credit bond issuers (of Clean Renewable Energy Bonds, Qualified Energy Conservation Bonds, Qualified Zone Academy Bonds, and Qualified School Construction Bonds) to elect to treat such bonds issued after 3/18/10 as Build America Bonds and qualifying for tax credits to be paid to the issuer instead of the holders of such bonds. While primarily applicable to state and local governments, potential purchasers of such bonds should be aware of this provision if they are considering these investments and were counting on possible credits coming to them.

Revenue Raisers

• Foreign Account Tax Compliance

• Reporting and withholding on certain foreign accounts - Adds a new chapter 4 to the Internal Revenue Code (comprising 4 new sections) that impose withholding and reporting requirements on persons making specified types of payments to certain foreign financial institutions and other foreign entities. The general rules are as follows: 

• The statutory withholding rate for withholdable payments to an applicable foreign financial institution or other covered foreign entity is 30%. 

• Withholdable payments generally include "(i) any payment of interest (including any original issue discount), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income, if such payment is from sources within the United States, and (ii) any gross proceeds from the sale or other disposition of any property of a type which can produce interest or dividends from sources within the United States." However, this term excludes any item of income that represents income connected with the conduct of a U.S. trade or business.

• Withholding agents are those "persons, in whatever capacity acting, having the control, receipt, custody, disposal, or payment of any withholdable payment."

• Covered foreign financial institutions are those that do not have an agreement with the U.S. Treasury for the collection, verification, maintenance, and reporting of information about direct or indirect U.S. owners of financial accounts held by that institution. Covered other foreign entities are those that are not covered "foreign financial institutions" as noted above and (1) the beneficial owner of the payment is either that entity or another non-financial foreign entity and (2) the recipient does not qualify for a waiver of withholding. A withholding waiver is generally available if the payee provides the withholding agent with either (a) certification that the beneficial owner does not have substantial U.S. owners or (b) the name, address, and taxpayer ID number of the beneficial owner. In addition, the withholding agent must not know or have reason to know that the information provided is incorrect and must also report the above information to the IRS.

• This provision is generally effective for payments made after 12/31/12.

• Repeal of certain foreign exceptions to registered bond requirements - This provision actually consists of several changes related to foreign-targeted bonds and the corresponding (1) exclusion from withholding on, and (2) deduction of, the interest payments on those bonds if certain tests are met.

• Repeal of exception to denial of deduction for interest on non-registered bonds - Repeals the exception to the denial of a deduction for interest on bonds not issued in registered form. As a result, interest deductions are disallowed attributable to obligations not issued in registered form, unless (1) issued by a natural person, (2) it has a maturity of one year or less, or (3) is not of a type offered to the public.
• An obligation is considered issued in registered form if (1) it is registered with its issuer (or agent) and may only be transferred by surrendering the old instrument and either (a) the reissuance to the new holder or (b) the issuance of a new instrument to the new holder, (2) the right to principal and interest may only be transferred through a book entry system maintained by the issuer (or agent), or (3) it is registered with the issuer (or agent) and may be transferred through both of the foregoing methods.

• Repeal of treatment as portfolio interest - Repeals the portfolio interest exception to withholding on interest from bonds that are not issued in registered form.
• Portfolio interest means any interest (including OID) that is (1) paid on a registered-form obligation and for which the beneficial owner has provided the U.S. withholding agent a statement certifying that the beneficial owner is not a U.S. person, or (2) paid on a non-registered form obligation that meets the foreign targeting requirements of the code. However, it does not include interest received by a 10% shareholder, certain contingent interest, interest received by a controlled foreign corporation from a related person, or certain interest received by a bank on an extension of credit.

• Dematerialized book-entry systems treated as registered form - Permits a debt obligation held through a dematerialized book entry system, or other specified book entry system, to be treated as being held through a book entry system for the purpose of treating the obligation as being in registered form.
• A dematerialized book entry system is one that tracks instruments (usually electronically) without the use of physical certificates.
• Effective for debt obligations issued after the date which is two years after the date of enactment (i.e., starting 3/19/12).

• Disclosure of information with respect to foreign financial assets - Imposes a disclosure requirement on individuals with an interest in a “specified foreign financial asset.” This requirement is met through a statement attached to their tax return for any year in which the aggregate value of all such assets is greater than $50,000.
• “Specified foreign financial assets” are specified accounts at foreign financial institutions. However, the following constitute such assets even if not held in an account at a financial institution: (1) stocks or securities issued by foreign persons, (2) financial instruments or contracts held for investment issued by (or having) a non-U.S. counterparty, and (3) any interest in a foreign entity.
• However, individuals are not required to disclose interests that are held in a custodial account with a U.S. financial institution.
• While the penalty is substantial ($10,000 plus additional amounts for continued failures, up to a maximum of $50,000 for each applicable taxable period), the penalty may be waived if the individual can establish the failure was due to reasonable cause and not willful neglect.
• Effective for taxable years beginning after 3/18/10.

• Penalties for underpayments attributable to undisclosed foreign financial assets - Adds a new 40% penalty on tax understatements related to undisclosed foreign financial assets. Applicable assets are those subject to mandatory information reporting where the disclosure requirements were not met. Applicable understatements are those attributable to any transaction involving such assets.
• Effective for taxable years beginning after 3/18/10.

• Modification of statute of limitations for significant omission of income in connection with foreign assets - Provides for an extended, 6-year, statute of limitations period within which the IRS can assess additional tax on understated income attributable to foreign financial assets. This provision applies if gross income in excess of $5,000 is omitted from an income tax return and that gross income is from assets for which foreign financial asset disclosure is required.
• Effective for returns filed after 3/18/10 as well as for any other return for which the assessment period has not yet expired as of 3/18/10.

• Reporting of activities with respect to passive foreign investment companies ("PFICs") - Imposes an information disclosure requirement on U.S. persons who are PFIC shareholders.
• A PFIC is any foreign corporation if (1) 75% or more of the gross income of the corporation for the taxable year is passive income, or (2) the average percentage of assets held by such corporation during the taxable year which produce passive income or which are held for the production of passive income is at least 50%. Passive income generally includes dividends, interest, royalties, rents, annuities, and net gains on assets that give rise to those types of income.
• Effective from 3/18/10.

• Clarifications with respect to foreign trusts which are treated as having a United States beneficiary - Clarifies, for purposes of determining whether a foreign trust is treated as having a U.S. beneficiary, that amounts should be treated as accumulated for a U.S. person's benefit even if that person's trust interest is contingent on a future event. Also clarifies that discretion to identify beneficiaries may also cause the trust to be treated as having a U.S. beneficiary. This is important in light of disclosure requirements (as noted below).
• Effective from 3/18/10.

• Presumption that foreign trust has United States beneficiary - Generally creates a presumption that a foreign trust has a U.S. beneficiary if a U.S. person directly or indirectly transfers property to a foreign trust, unless the transferor provides satisfactory information to the contrary to the IRS.
• Effective for property transfers after 3/18/10.

• Uncompensated use of trust property - Provides that the use of trust property, including cash, by (1) the U.S. grantor, (2) U.S. beneficiary or (3) any U.S. person related to either of those two must be treated as a distribution to the extent of the fair market value of the property's use to the U.S. grantor or U.S. beneficiary, unless the fair market value of that use is paid to the trust within a reasonable amount of time.
• The provision applies to loans made and uses of property after 3/18/10.

• Reporting requirement of United States owners of foreign trusts - Requires any U.S. person treated as the owner of any portion of a foreign trust to submit IRS-required information and ensure that the trust file a return of its activities and provide such information to its owners and distributees.
• Effective for taxable years beginning after 3/18/10.

• Minimum penalty with respect to failure to report on certain foreign trusts - Increases the minimum penalty for failure to provide timely and complete disclosure on foreign trusts to the greater of $10,000 or 35% of the amount that should have been reported. In the case of failure to properly disclose by the U.S. owner of a foreign trust of the year-end value, the minimum penalty would be the greater of $10,000 or 5% of the amount that should have been reported. 
• Effective for notices and returns required to be filed after December 31, 2009.

• Substitute dividends and dividend equivalent payments received by foreign persons treated as dividends - Treats substitute dividends and dividend equivalents as if they were U.S.-source dividends for purposes of withholding on payments to foreign persons.
• Substitute dividends and dividend equivalent payments are those payments that are economically the same as dividends made with respect to the underlying stock in the context of a securities lending or sale-repurchase transaction.
• Effective for payments made on or after the date that is 180 days after 3/18/10 (i.e., starting 9/14/10).

• Delay in Application of Worldwide Allocation of Interest - Delays the availability date of the one-time election for an affiliated group's domestic members to allocate and apportion interest expense and a worldwide group basis for purposes of determining foreign source income in the context of the foreign tax credit.
• Election may not be made before tax years beginning after 12/31/20.

• Time for Payment of Corporate Estimated Tax - Accelerates the timing of required corporate estimated tax payments due in July, August, or September of 2014, 2015, and 2019. This provision applies to corporations with assets of at least $1 billion as of the end of the preceding year.

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