On March 18, 2010, President Obama signed into law the “Hiring Incentives to Restore Employment Act.” The centerpiece of the Act is a payroll tax holiday for employers who hire unemployed workers (plus an employer income tax credit if the new hires are retained for at least one year). The Act also extends the enhanced Section 179 expensing rules for 2010, makes important changes for tax credit bond issuers, and creates new provisions to combat offshore tax evasion. This Client Alert provides a summary of these new provisions.
Payroll tax holiday and income tax credit for employers who hire unemployed workers. To help stimulate the hiring of unemployed workers, the Act exempts any private-sector employer that hires a worker who had been unemployed for at least 60 days from paying the employer's share of the Social Security employment tax (but not the Medicare employment tax) for wages paid during the remainder of 2010. (The employer's share of the Social Security employment tax is 6.2% on the first $106,800 of wages; the employer's share of the Medicare employment tax is 1.45% on all wages.) Plus, as an incentive to retain the new hires, for any qualifying worker that the employer keeps on payroll for a continuous 52 weeks, the employer is eligible for a non-refundable tax credit of up to $1,000 after the 52-week threshold is reached, to be taken on the employer’s 2011 tax return. In order to be eligible for the tax credit, the employee's pay in the second 26-week period must be at least 80% of the pay in the first 26-week period.
Workers hired after the date of introduction of the legislation (February 3, 2010) count for purposes of the new hiring incentives, but only wages paid after the date of enactment (March 18, 2010) receive the exemption for payroll taxes.
Here are some additional features of the new hiring provisions:
- The provisions generally apply only to private-sector employment, including nonprofit organizations, but public sector jobs are generally not eligible for either benefit. However, employment by a public higher education institution qualifies.
- For the hiring to qualify, the new hire must sign an affidavit, under penalties of perjury, stating that he or she has not been employed for more than 40 hours during the 60-day period ending on the date the employment begins. The IRS is developing a sample affidavit form.
- A worker who replaces another employee who performed the same job for the employer is not eligible for the benefit, unless the prior employee left the job voluntarily or for cause.
- An employer may not claim the new tax breaks for hiring family members.
- The payroll tax holiday does not apply with respect to wages paid during the first calendar quarter of 2010, but the amount by which the Social Security payroll tax would have been reduced under the payroll tax holiday provision during the first calendar quarter is applied against the tax imposed on the employer for the second calendar quarter of 2010.
- The tax credit for retaining qualifying new hires 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. Thus, the credit for a retained worker will be $1,000 if the retained worker's wages during the 52-consecutive-week period exceed $16,130.
- For workers that would otherwise be eligible for the “Work Opportunity Tax Credit,” the employer must select one benefit or the other for 2010—no double dipping.
Extension of enhanced Section 179 expensing. The Act retroactively extends for another year the enhanced Section 179 expensing rules, which allow qualifying businesses the option to currently deduct the cost of new and used tangible property (e.g., business machinery and equipment), instead of recovering it via depreciation over a number of years. For property placed in service in 2010, the maximum amount that a business may expense is $250,000, and the expensing election begins to phase out when a business buys more than $800,000 of expensing-eligible assets. These dollar limits are the same as those that were in effect for 2008 and 2009.
Expansion of direct payment option for certain tax credit bonds. Under the current rules for “qualified tax credit bonds,” state and local governments may issue bonds for school construction, energy conservation and renewable energy, and the federal government provides the bondholders with a federal tax credit in place of interest that would otherwise be payable on the bonds. There has been little market demand for these tax credit bonds. In contrast, credit markets have shown a large appetite for so-called “direct payment option” Build America Bonds (enacted as part of the 2009 economic stimulus bill), where state and local governments elect to receive a direct payment from the federal government in lieu of the tax credit to the bondholders. In order to unclog the market for school construction, energy conservation and renewable energy bonds, the Act expands the direct payment option to bonds for school construction, energy conservation and renewable energy issued after March 18, 2010.
New provisions to combat off-shore tax evasions. To pay for its tax incentives, the Act includes several provisions from the Foreign Account Tax Compliance Act (“FATCA”) that was introduced in Congress in October 2009 to combat offshore tax evasion. Included among the many FACTA provisions are new rules which:
Impose new information reporting requirements and penalties for U.S. taxpayers with foreign financial assets.
Increase the statute of limitations to six years for failure to report certain offshore transactions and income.
Clarify when a foreign trust is considered to have a U.S. beneficiary.
Impose a 30 percent withholding on U.S.-source payments to either (i) foreign financial institutions that fail to identify U.S. accounts and their owners and assets to the IRS, or (ii) non-financial foreign entities that fail to identify to the IRS U.S. individuals with a 10 percent or more ownership interest in the firm.
Treat substitute dividend payments and dividend equivalent payments to foreign persons as dividends for purposes of U.S. withholding.
Require shareholders in passive foreign investment companies (PFICs) to file annual returns.
Other revenue provisions. Other revenue provisions designed to pay for the Act’s tax incentives include: (1) a three-year delay (through 2020) of implementation of the worldwide allocation of interest (a liberalized rule for allocating interest expense between U.S. sources and foreign sources for purposes of determining a taxpayer's foreign tax credit limitation), and (2) increases in corporate estimated tax payments for corporations with at least $1 billion in assets for the third quarters of 2014, 2015, and 2019.
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