First 2010 Tax Act Focuses On Payroll Tax Reductions And Small Business Equipment Expensing

March 2010

President Obama signed the first of what will likely be several pieces of tax legislation in 2010. The Hiring Incentives to Restore Employment (HIRE) Act contains the following major tax provisions:

1. A payroll tax credit equal to the employer’s share of Social Security taxes on wages paid in 2010 for employers who hire workers who have been unemployed for at least 60 days and who are not replacement hires. Employees hired to fill vacancies caused by either a voluntary employee separation or a for-cause termination also qualify. The credit pertains to employees hired after February 3, 2010, and before January 1, 2011. Family members do not qualify. To qualify for the hiring tax credit, the employer must get a statement from each eligible new hire certifying that he was unemployed during the 60 days before beginning work, or worked fewer than 40 hours during the preceding 60-day period. The IRS is currently developing a form employees can use to make the required statement.
2. A credit of the lesser of (i) 6.2 percent of wages or (ii) $1,000 per employee for employers who retain newly-hired employees for at least 52 weeks. Part-time employees also qualify for both the tax credit and the payroll tax credit identified in #1 above.
3. Extends the increased Section 179 deduction through 2010. This allows a $250,000 maximum expensing of equipment purchases and software, instead of having to capitalize and depreciate such purchases. Since the deductible value is decreased by equipment purchases exceeding $800,000, this benefit applies only to smaller businesses. Without this change, the maximum equipment purchase expense would have dropped to $134,000 for 2010.
4. Expands the Build America Bonds program to allow issuers of other qualified tax credit bonds used for construction of schools and energy-related projects to receive refundable credits. The bonds provide a direct subsidy of 65 percent of the interest payment to the bond issuer instead of the bond holder.

These tax goodies are to be partially paid by the following:

1. Increased tax compliance by requiring foreign financial institutions to report information regarding U.S. account holders. If the information is not reported, a 30% withholding tax applies. Additionally, the statute of limitations is increased to six years for failure to report certain offshore transactions and income.
2. Increased corporate estimated tax payments for corporations with at least $1 billion in assets for the third quarters of 2014, 2015, and 2019.
3. An additional three year delay in the worldwide interest expense allocation rules (through 2020). The worldwide interest allocation election was first enacted in 2004, but has been delayed numerous times since then. These rules have never actually taken effect.

Additional tax legislation is coming. Here is what to expect:

1. The House and the Senate have already approved their own packages of numerous tax law extenders, including a COBRA premium assistance subsidy. The House and Senate versions are now in the process of being reconciled.
2. Legislation to reenact the estate tax, which was otherwise repealed for 2010.
3. Continue the pattern of prior years’ alternative minimum tax (AMT) “patches”, which prevent the expansion of the AMT to additional taxpayers.
4. Extend certain existing individual marginal income tax rates that would otherwise expire at the end of 2010 for those now in the lower and middle income tax rates. 5. Create a “cash for caulkers” program that would provide a tax credit for Americans who weatherize their homes.

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