March was a busy month for legislation that impacts taxes of businesses. In addition to the much-hyped health care legislation, legislation to encourage hiring was also enacted.
On March 18, President Obama signed HR 2847, the Hiring Incentives to Restore Employment Act. The HIRE Act contains a number of tax provisions intended to promote hiring and encourage business investment. The act also contains substantial new compliance requirements related to foreign accounts and foreign assets.
The hiring incentives may be welcome news for West Michigan employers and other employers across the nation that may be considering whether to increase their business’s work forces. The incentives for capital investment also may be attractive, though the incentives are an extension of an incentive enacted earlier.
The HIRE Act contains a payroll tax exemption provision to encourage the hiring of certain employees. Under the payroll tax exemption provision, the act exempts employers from paying the employer share of Social Security employment taxes (6.2 percent of the first $106,800 of wages) for wages paid in 2010, with respect to an employee hired after Feb. 3, 2010, and before Jan. 1, 2011.
The credit applies to any wages paid between March 18 and Dec. 31, 2010. The exemption is available only if the new employee: (1) was previously unemployed (had not worked more than 40 hours during the 60-day period ending on the date that employment begins); and (2) does not replace another employee of the employer, unless the replaced employee left employment voluntarily or for cause. The exemption does not apply to the United States, any state or any political subdivision of a state, or any instrumentality of the foregoing. However, state colleges and universities are eligible employers.
Qualified employees for the payroll tax exemption are employees who begin qualified employment with a qualified employer after Feb. 3, 2010, and before Jan. 1, 2011, who have been unemployed or employed less than 40 hours during the 60-day period ending on the date such employment begins, and who are not family members or related in certain other ways to the employer.
Qualified employees must certify by a signed affidavit (under penalties of perjury) that they have not been employed for more than 40 hours during the 60-day period ending on the date they started employment. The IRS issued Form W-11 on April 7, which includes an affidavit from the employee regarding his/her employment status in the prior 60 days.
The 60-day unemployment period must be continuous and can span over the 2009-2010 time period. The payroll tax exemption does not apply to wages paid to an employee who was hired to replace an existing worker, unless the existing worker terminated employment voluntarily or was terminated for cause. The employer may apply for the payroll tax exemption for wages paid to a rehired employee who is otherwise a qualified employee.
Other employment tax credits may be impacted by the HIRE Act credits. To the extent the employer clams other employment tax credits such as the Work Opportunity Tax Credit, the same wages cannot be counted for purposes of claiming both the payroll tax exemption and the WOTC credit.
The IRS is providing some assistance and information to assist employers in determining their ability and eligibility to take advantage of the incentives. The IRS has posted frequently asked questions regarding the tax credit on its Web site.
The HIRE Act also contains provisions as an incentive to retain employees. To encourage employers to retain these new employees, the act provides a new business tax credit with respect to each retained employee. The credit is the lesser of $1,000 or 6.2 percent of the wages paid to the retained employee during the 52-consecutive-week period. The new credit may not be carried back.
This credit applies for each qualified individual hired after Feb. 3, 2010, and the employee stays employed with the employer for 52 consecutive weeks. For the employer to claim benefit of the retention credit, the wages paid during the previous 26 weeks must be at least 80 percent of the wages paid the first 26 weeks of employment of the qualified employee.
Many payroll-processing service providers also have information for employers to take advantage of these provisions if the employer so qualifies. If a business uses one of these payroll processing services, they may have information and processes in place to capture the appropriate information.
The HIRE Act also includes an extension of enhanced small business expensing of certain capital expenditures for fixed asset purchases. In 2009, small businesses were able to write off $250,000 of capital expenditures, with a phase-out if the amount of qualifying property exceeded $800,000. This provision expired Dec. 31, 2009, and the dollar amounts were to have reverted to historically lower levels. The HIRE Act extends the $250,000 expensing level (and the $800,000 phase-out limitation) through Dec. 31, 2010.
The HIRE Act also includes certain provisions related to U.S. taxpayers that may have foreign investments or accounts. These provisions may require additional disclosure and reporting with respect to these investments and accounts. This additional disclosure has been included in several recent items of legislation and was expected given the concern over international tax administration and the increased enforcement and examination activity by the IRS in this area.
The employment-related incentives in the HIRE Act may be a welcome boost for many businesses considering their specific employee needs. As the economic downturn has begun to reverse course, the impact of these and other initiatives may contribute to a recovery.
William F. Roth II is a tax partner with BDO Seidman LLP. The views expressed above are those of the author and not necessarily those of BDO Seidman LLP. The comments expressed above are general in nature and are not to be considered as any specific tax or accounting advice and cannot be relied upon for the purpose of avoiding penalties. Readers are urged to consult with their professional advisers before acting on any items discussed herein.
