Congress Passes the HIRE Act

Yesterday, the Senate approved H.R. 2847, carrying the HIRE (Hiring Incentives to Restore Employment) Act, as passed by the House. The HIRE Act is cleared for the President’s signature.

The following tax changes will be part of this act:

• Exempts employers from paying the employer share of Social Security employment taxes on wages paid in 2010 to newly hired qualified unemployed workers. These are workers who: (1) begin employment with the employer after February 3, 2010 and before January 1, 2011, (2) were previously unemployed and (3) do not replace other employees of the employer. The payroll tax relief applies only for wages paid with respect to employment beginning on the day after the enactment date (the date the HIRE Act is signed into law by the President) and before 2011.
• Provides employers with an up-to-$1,000 tax credit for retaining qualified unemployed workers. The workers must be employed by the employer for a period of not less than 52 consecutive weeks, and their wages for such employment during the last 26 weeks of the period must equal at least 80% of the wages for the first 26 weeks of the period.
• For tax years beginning in 2010, boosts to $250,000 the maximum amount that can be expensed under Code Sec. 179, and boosts to $800,000 the beginning of the investment based phaseout amount.
• Allows issuers of certain tax credit bonds to elect to receive a direct payment instead of a tax credit to the bondholder.
• Enacts a comprehensive set of measures to reduce offshore noncompliance.
• Delays the application of worldwide allocation of interest for an additional three years.
• Tinkers with estimated tax payments of large corporations in future tax years.

Contact your BCG&Co. tax advisor with further questions on how this can impact your organization.
(330) 864-6661

From AICPA Tax News
President Obama’s FY2011 Budget includes a list of tax proposals that will impact individuals and businesses. Several proposals will appear familiar as they are just extensions from last year’s stimulus legislation while others are revisits to past proposals. Congress will shortly begin to review these proposals and probably add some of its own to this list. Following is a partial listing separated by whether they are tax reduction or tax increase proposals.

Business Proposals
 Tax Reductions:

• Extend Section 179 expensing limit of $250,000 one more year
• Extend 50% Bonus Depreciation one more year
• Remove cell phones and other similar devices from the definition of Listed Property
• Make the R&E credit permanent
• Extend COBRA Subsidy payments until Jan. 1, 2011
• Create a new Jobs Tax credit for hiring new employees

 Tax Increases:

• Tax Carried Interest as ordinary income
• Repeal Last in First Out (LIFO) inventory accounting method
• Repeal lower of cost or market inventory accounting method
• Codify the Economic Substance Doctrine
• Institute International Tax Reforms
• Rewrite the definition of “Independent Contractor”

Individual Proposals
 Tax Reductions:

• Extend AMT indexation permanently
• Extend Making Work Pay Credit for one year
• Extend Education Tax Credits permanently
• Extend Energy Tax Credits for one more year
• Extend Economic Recovery Payment for one more year

 Tax Increases:

• Allow 2001 Tax Rates to expire and continue current rates for taxpayers below $250,000 but increase rates for those above
• Reinstate 3% limitation on itemized deductions and on personal exemptions
• Limit the tax benefit of itemized deductions to 28%
• Increase Capital Gains Rates to 20% for those with incomes above $250,000, keep 15% rate for those below
• Estate Taxes- The President’s budget presumes that the 2009 estate tax rates and exemption levels will be reinstated for 2010 and 2011. It also proposes changes in valuation rules by limiting valuation discounts for minority interests and tightening rules on the use of grantor retained annuity trusts (GRATs).

In addition to these the list of expiring provisions proposed by the House of Representatives in December, would be extended for one year. The full FY 2011 Budget Proposal is available at the Department Of Treasury.

On November 6, the President signed into law H.R. 3548, the ”Worker, Homeownership, and Business Assistance Act of 2009.” The new law extends and generally liberalizes the tax credit for first-time homebuyers, making it a much more flexible tax-saving tool. It also includes some crackdowns designed to prevent abuse of the credit. These important changes could it make it easier for you or someone in your family to buy a home. And because the changes generally aid buyers and aim to improve residential real estate markets nationwide, they also could make it easier for you or someone in your family to sell a home.  

Homebuyer credit basics. Before the new law was enacted, the homebuyer credit was only available for qualifying first-time home purchases after April 8, 2008, and before December 1, 2009. The top credit for homes bought in 2009 is $8,000 ($4,000 for a married individual filing separately) or 10% of the residence’s purchase price, whichever is less. Only the purchase of a main home located in the U.S. qualifies. Vacation homes and rental properties are not eligible. The homebuyer credit reduces one’s tax liability on a dollar-for-dollar basis, and if the credit is more than the tax you owe, the difference is paid to you as a tax refund. For homes bought after Dec. 31, 2008, the homebuyer credit is recaptured (i.e., paid back to the IRS) if a person disposes of the home (or stops using it as a principal residence) within 36 months from the date of purchase.   Before the new law, the first-time homebuyer credit phased out for individual taxpayers with modified adjusted gross income (AGI) between $75,000 and $95,000 ($150,000 and $170,000 for joint filers) for the year of purchase.  

Your guide to the revised homebuyer credit.
The new law makes four important changes to the homebuyer credit:

(1) New lease on life for the homebuyer credit. The homebuyer credit is extended to apply to a principal residence bought before May 1, 2010. The homebuyer credit also applies to a principal residence bought before July 1, 2010 by a person who enters into a written binding contract before May 1, 2010, to close on the purchase of the principal residence before July 1, 2010. In general, a home is considered bought for credit purposes when the closing takes place. So the extra two-months (May and June of 2010) helps buyers who find a home they like but can’t close on it before May 1, 2010. They can go to contract on the home before May 1, 2010, close on it before July 1, 2010, and get the homebuyer credit (if they otherwise qualify). Note that certain service members on qualified official extended duty service outside of the U.S. get an extra year to buy a qualifying home and get the credit; they also can avoid the recapture rules under certain circumstances.

(2) The homebuyer credit may be claimed by existing homeowners who are “long-time residents.” For purchases after November 6, 2009, you can claim the homebuyer credit if you (and, if married, your spouse) maintained the same principal residence for any 5-consecutive year period during the 8-years ending on the date that you buy the subsequent principal residence. For example, if you and your spouse are empty nesters who have lived in your suburban home for the past ten years, you are potentially eligible for the credit if you “move down” and buy a smaller townhome. There’s no requirement for your current home to be sold in order to qualify for a homebuyer credit on the replacement principal residence. Thus, the replacement residence can be bought to beat the new deadlines (explained above) before the old home is sold. For that matter, you can hold on to your prior principal residence in the hope of achieving a better selling price later on.
The maximum allowable homebuyer credit for qualifying existing homeowners is $6,500 ($3,250 for a married individual filing separately), or 10% of the purchase price of the subsequent principal residence, whichever is less.  

(3) The homebuyer credit is available to higher income taxpayers. For purchases after November 6, 2009, the homebuyer credit phases out over much higher modified AGI levels, making the credit available to a much bigger pool of buyers. For individuals, the phaseout range is between $125,000 and $145,000, and for those filing a joint return, it’s between $225,000 and $245,000.  

(4) There’s a new home-price limit for the homebuyer credit. For purchases after Nov. 6, 2009, the homebuyer credit cannot be claimed for a home if its purchase price exceeds $800,000. It’s important to note that there is no phaseout mechanism. A purchase price that exceeds the $800,000 threshold by even a single dollar will cause the loss of the entire credit.   The new purchase price limitation applies whether you are buying a first-time principal residence or are a qualifying existing homeowner purchasing a replacement principal residence.  

Other homebuyer credit changes. The new law includes a number of new anti-abuse rules to prevent taxpayers from claiming the homebuyer credit even though they don’t qualify for it. The most important of these are as follows:

• Beginning with the 2010 tax return, the homebuyer credit can’t be claimed unless the taxpayer attaches to the return a properly executed copy of the settlement statement used to complete the purchase of the qualifying residence.
• For purchases after Nov. 6, 2009, the homebuyer credit can’t be claimed unless the taxpayer has attained 18 years of age as of the date of purchase (a married person is treated as meeting the age requirement if he or his spouse meets the age requirement).
• For purchases after Nov. 6, 2009, the homebuyer credit can’t be claimed by a taxpayer if he can be claimed as a dependent by another taxpayer for the tax year of purchase. It also can’t be claimed for a home bought from a person related to the buyer or the spouse of the buyer, if married.
• Beginning with 2009 returns, the new law makes it easier for the IRS to go after questionable homebuyer credit claims without initiating a full-scale audit.

What hasn’t changed. The tax law still gives you the extraordinary opportunity to get your hands on homebuyer credit cash without waiting to file your tax return for the year in which you buy the qualifying principal residence. Thus, if you buy a qualifying principal residence in 2009 you can treat the purchase as having taken place this past December 31, file an amended return for 2008 claiming the credit for that year, and get your homebuyer credit cash relatively quickly via a tax refund. Similarly, you can treat a qualifying principal residence bought in 2010 (before the new deadlines) as having taken place on December 31, 2009, and file an original or amended return for 2009 claiming the credit for that year.  

Five-Year Carryback of NOLs Extended to Include 2009 NOLs and to Apply to Most Businesses

A net operating loss (NOL) is the excess of business deductions (computed with certain modifications) over gross income in a particular tax year. The loss can be deducted, through an NOL carryback or carryover, in another tax year in which gross income exceeds business deductions. In general, NOLs may be carried back two years and forward 20 years. The NOL is first carried back to the earliest tax year for which it’s allowable as a carryback or a carryover, and is then carried to the next earliest tax year. A taxpayer may elect to forego the entire carryback period for an NOL and instead carry it forward. Life insurance companies may carry back losses for three years.

If a corporation has a corporate equity reduction transaction (a CERT, i.e., a major stock acquisition or an excess distribution) and an “excess interest loss” (i.e., interest allocable to the CERT) for a “loss limitation year,” the loss is an NOL. It’s subject to the regular NOL carryback and carryover rules, except that it can’t be carried back to a tax year before the year in which the CERT occurred. The “loss limitation year” is generally the tax year in which the CERT occurred (the “CERT year”) and each of the next two tax years.

For purposes of the alternative minimum tax (AMT), a taxpayer’s NOL deduction cannot reduce the taxpayer’s alternative minimum taxable income (AMTI) by more than 90% of the AMTI.

For NOLs arising in tax years ending after Dec. 31, 2007, small businesses can elect to increase the NOL carryback period for an applicable 2008 NOL (the “applicable NOL”) from 2 years to 3, 4, or 5 years. A small business for this purpose is defined as a corporation or partnership that meets the gross receipts test of ) (applied by substituting $15 million for $5 million) for the tax year in which the loss arose, or a sole proprietorship that would meet that test if the proprietorship were a corporation. This means any trade or business (including one conducted in or through a corporation, partnership, or sole proprietorship) whose average annual gross receipts (for the three-tax-year period (or shorter period of existence) ending with the tax year in which the loss arose are $15 million or less.

An applicable 2008 NOL is the taxpayer’s NOL for any tax year ending in 2008, or, at the taxpayer’s election, any tax year beginning in 2008. Any such election is irrevocable. Additionally, any carryback election may be made only with respect to one tax year. If an eligible small business makes an election to increase the carryback period for an applicable 2008 NOL, then (which defines “loss limitation year”) is applied by using the whole number that is one less than the number of years the taxpayer elected as the carryback for the NOL instead of “two.”

New law. The Act provides an election for most taxpayers (not just small businesses) to increase the carryback period for an applicable NOL to 3, 4, or 5 years from 2 years. An applicable NOL means the taxpayer’s NOL for any tax year ending after Dec. 31, 2007, and beginning before Jan. 1, 2010.  Generally, an election may be made for only one tax year.However, an eligible small business that made or makes an election under the Code as in effect before Nov. 6, 2009 (the enactment date) may make an election for 2 tax years instead of just 1.

The amount of the NOL that can be carried back to the 5th tax year before the loss year may not be more than 50% of the taxpayer’s taxable income for that 5th preceding tax year determined without taking into account any NOL for the loss year or for any tax year after the loss year.  The amount of the NOL otherwise carried to tax years after the 5th preceding tax year is adjusted to take into account that the NOL could offset only 50% of the taxable income for that 5th preceding tax year.

RIA illustration : Corp X, a taxpayer that is not a small business, has an NOL of $5 million for its tax year ending Aug. 31, 2009. In its tax year ending Aug. 31, 2004, it had taxable income of $6 million. If X elects to carry its NOL back to its 2004 tax year, then it will be able to apply only $3 million of that loss against its taxable income for 2004. In determining the amount of the NOL that can be carried forward to years ending after Aug. 31, 2004 by X, the NOL is reduced by only the $3 million that it offset for the 2004 tax year.

The 50% limitation does not apply to the applicable 2008 NOL of an eligible small business with respect to which an election is made under pre-Act law even if the election is made after Nov. 6, 2009.

As was the case for small businesses, if an eligible business makes an election to increase the carryback period for an applicable 2008 NOL, then (which defines “loss limitation year”) is applied by using the whole number that is one less than the number of years the taxpayer elected as the carryback for the NOL instead of “two.”

If you have questions please contact a tax expert at (330) 864-6661.

This past Wednesday,  a U.S. District Court issued a long-awaited decision in the Chamber of Commerce of the United States of America v. Napolitano case. A number of groups including U.S. Chamber of Commerce, Society of Human Resource Management (SHRM),  and Associated Builders and Contractors, Inc., challenged the legality of an Executive Order requiring that federal contractors use E-Verify to check the employment eligibility of all newly hired employees, as well as all current employees directly working on a contract.

The groups challenged the legality of Executive Order 13464 and its implementing regulations arguing that it was neither legally justified nor practical for federal contractors to implement.  Unfortunately, the court discounted the group’s arguments deciding the case in favor of the government and ruling that the regulation should go forward.

The rule is scheduled to go into effect on September 8, 2009.  This deadline means that most federal contracts awarded, as well as solicitations issued after September 8, 2009, must include a clause mandating use of E-Verify for all employees hired during the contract period and all existing employees assigned to perform work under the contract. 

The United States Citizenship and Immigration Services (USCIS) has published information and on its website regarding application of the rule. To access the page the addresses frequently asked questions please click here.

If you have any additional questions in regard to this ruling, please contact me at (330) 572-8049 or jim.krosky@bcgcompany.com

IR-2009-69, July 29, 2009

WASHINGTON — The Internal Revenue Service today announced its first successful prosecution related to fraud involving the first-time homebuyer credit and warned taxpayers to beware of this type of scheme.

On Thursday July 23, 2009, a Jacksonville, Fla.-tax preparer, James Otto Price III, pled guilty to falsely claiming the first-time homebuyer credit on a client’s federal tax return. Price faces the possibility of up to three years in jail, a fine of as much as $250,000, or both.

To date, the IRS has executed seven search warrants and currently has 24 open criminal investigations in pursuit of potential instances of fraud involving the credit. The agency has a number of sophisticated computer screening tools to quickly identify returns that may contain fraudulent claims for the first-time homebuyer credit.

“We will vigorously pursue anyone who falsely tries to claim this or any other tax credit or deduction,” said Eileen Mayer, Chief, IRS Criminal Investigation. “The penalties for tax fraud are steep. Taxpayers should be wary of anyone who promises to get them a big refund.”

Whether a taxpayer prepares his or her own return or uses the services of a paid preparer, it is the taxpayer who is ultimately responsible for the accuracy of the return. Fraudulent returns may result not only in the required payment of back taxes but also in penalties and interest.

First-Time Homebuyer Credit

The First-Time Homebuyer Credit, originally passed in 2008 and modified in 2009, provides up to $8,000 for first-time homebuyers. The purchaser, however, must qualify as a first-time homebuyer, which for purposes of this credit means someone who has not owned a primary residence in the past three years. If the taxpayer is married, this requirement also applies to the taxpayer’s spouse. The home purchase must close before Dec. 1, 2009, to qualify, and the credit may not be claimed on the purchaser’s tax return until after the taxpayer closes and has purchased the home.

Different rules apply for homes bought in 2008.

Full details and instructions are available on the official IRS Web site: http://www.irs.gov

Washington has enacted a comprehensive package of environmental tax incentives, generally effective July 1, 2009. Incentives include an extended and expanded sales and use tax exemption for alternative electrical generation equipment, a reduced business and occupation tax rate for solar energy systems manufacturers, and a business and occupation tax credit for timber harvesters who harvest biomass for energy production.

Business and occupation tax incentives. Timber harvesters: Timber harvesters can get credits for forest-derived biomass sold, transferred or used for production of electricity, steam, heat or biofuel. The credit is $3 for each green ton of forest-derived biomass harvested from July 1, 2010 through June 30, 2013 and $5 for each green ton harvested from July 1, 2013 through June 30, 2015. Credits are not refundable, but 2-year carryforwards are allowed.

Solar energy systems manufacturers: A new reduced rate of 0.275% applies to taxpayers who manufacture or sell at wholesale solar energy systems which use photovoltaic modules or solar grade silicon together with a specified list of components. The reduced rate is effective October 1, 2009 through June 30, 2014. The normal rate for these activities is 0.2904%. (more…)

The American Recovery and Reinvestment Act has brought on many changes, it is hard to keep up with all of them, and more importantly know which ones affect you.  We will try and post them as they come through.

The most recent change announced is the the new withholding adjustment for pension plans.

WASHINGTON – As part of a wider outreach effort to educate taxpayers about the benefits they will receive under the American Recovery and Reinvestment Act, the Internal Revenue Service today released new withholding adjustment procedures for pension plans.

In February, the IRS issued revised withholding tables incorporating the Making Work Pay Tax Credit, one of the key provisions of the American Recovery and Reinvestment Act. That change resulted in more take home pay for more than 120 million American households and provided an immediate economic stimulus. The new procedure for pensions will make withholding more accurate for pension recipients. (more…)

The announcement of Senator Arlen Specter switching to the Democratic Party could potentially shed a completely different light on some pending legislation. In regard to the Employee Free Choice Act (EFCA), Senator Specter stated that even though he has switched to the Democratic Party, he does not intend to change his stance opposing the legislation in its current form. We should, however, consider the real possibility of a revised version of the bill, or at the very least, significant changes to the current National Labor Relations Act. In addition to potential impact on the EFCA, the switch also brings our attention to legislation dealing with workplace flexibility such as the Healthy Families Act and changes to Family Medical Leave.

What should employers do?

EFCA
Conduct a vulnerability audit. This type of audit is designed to identify areas in which your organization could be vulnerable to a union organizing campaign and will identify compliance issues with policies and programs. Typical areas that a vulnerability audit would examine are:

• Policies and Procedures

• Training and Development

• Benefits and Compensation

• Workers Compensation/Safety

Once these vulnerability and compliance issues are identified, an action plan should be developed to address these findings. In addition to the vulnerability audit, employers should provide training to their supervisors and managers. Some topics to include:

• Signs and warnings of a union campaign

• What do authorization cards look like and how do they work?

• What a supervisor can and cannot do to prevent unionization

Workplace Flexibility
It is widely expected that the Healthy Families Act will be introduced around Mother’s Day. This legislation requires an employer to provide paid sick leave to full- and part-time employees. It applies to public and private employers with 15 or more employees working 20 or more calendar workweeks in the current or preceeding year. It provides up to seven days of paid sick leave for full-time employees working more than 30 hours per week year round or 1, 500 hours in one year.
At this point, employers should begin to analyze their time off and benefit plans to determine what the impact would be and possible action steps. The language mentioned above is some of the language being discussed and could be modified before the Act is introduced.
The Family Leave Insurance Act amends and expands FMLA by:

• Lowering the qualifying number of employees from 50 to 25.

• Allowing up to 24 hours in a 12 month period for parental involvement and family wellness leave.

• Prohibiting more than 4 hours of leave during a 30 day period.

• Providing employee leave to participate/attend school or community sponsored activities of child or grandchild.

• Allowing employee leave to meet routine family medical needs of spouse, child or grandchild of employee or to care for elderly relatives, including visits to nursing/group homes.

Employers should consider analyzing their current FMLA practices. For employers that are in that 25-50 employee category, I recommend you familiarize yourself with the current FMLA law and monitor the progress of this Act.

If you have any questions regarding this information or need any assistance in conducting vulnerability audits or management/supervisor training, contact me at (330) 572-8049 or jim.krosky@bcgcompany.com

WASHINGON – The Internal Revenue Service today reminded individual and business taxpayers that many energy-saving steps taken this year may result in bigger tax savings next year.

The recently enacted American Recovery and Reinvestment (ARRA) of 2009 contained a number of either new or expanded tax benefits on expenditures to reduce energy use or create new energy sources.The IRS encouraged individuals and businesses to explore whether they are eligible for any of the new energy tax provisions.

(more…)

While the new law tax changes in the American Recovery and Reinvestment Act of 2009 were the most significant developments in the first quarter of 2009, many other tax developments may affect you, your family, and your livelihood. These other key developments in the first quarter of 2009 are summarized below. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

Retirement plan account participants, IRA owners, and their beneficiaries do not have to take required minimum distributions (RMDs) for 2009. The IRS has issued guidance clarifying that:

… If you would have been required to make RMDs for 2009 and you do make withdrawals in 2009 (that are not RMDs for 2008): (a) you might be able to roll over the withdrawn amounts into other eligible retirement plans; but (b) you must still include any previously untaxed portion of the withdrawal that you do not roll over in your gross income.

… No 2008 RMDs are waived, even for eligible individuals who chose to delay taking their 2008 RMD until Apr. 1, 2009 (e.g., retired employees and IRA owners who turned 70 1/2 in 2008).

… The 2009 RMD waiver applies to individuals who may be eligible to postpone taking their 2009 RMD until Apr. 1, 2010 (generally, retired employees and IRA owners who attain age 70 1/2 in 2009). However, the law does not waive any RMDs for 2010.

… If a beneficiary is receiving distributions over a 5-year period, he or she can waive the distribution for 2009, effectively permitting the beneficiary to take distributions over a 6-year period. (more…)