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.

During the State of the Union Address, President Obama announced his support for legislation to provide a tax credit for companies that hire additional employees.

The tax credit for new hires will likely focus on small businesses.  It is expected that there will be safeguards placed in the bill to prevent companies from hiring an employee and then laying the employee off after the employer receives the tax credit.  Similar legislation was discussed in 2009, but no action was taken by Congress. 

Sources say legislation currently being worked on by Senate Democrats is likely to provide a 20 percent tax credit for companies with fewer than 100 employees that hire a new employee, and a 15 percent tax credit for larger companies.  The amount of tax credits any one company could receive would be capped at $350,000.  The Senate could consider this proposal in the upcoming weeks. 

Another option being discussed is a proposal by Senators Charles Schumer (D-NY) and Orrin Hatch (R-UT) that would waive the Social Security payroll tax for any employer that hires a new employee in 2010, and offering an additional $1,000 tax credit in 2011 if the employee is kept on the payroll for 52 continuous weeks.  This proposal would apply to private sector employees only and any employer who had a lower total payroll in 2010 than it had in 2009 would have to forfeit the tax benefit.

The Senate by voice vote approved H.R. 4462, a bill that would allow donors to accelerate the income tax benefits of charitable cash contributions for the relief of victims of the earthquake in Haiti. The bill had previously been passed by the House on January 20 by voice. Accordingly, the bill is now cleared for signature by the President, which is expected this week.

The bill would allow individuals who make charitable contributions to aid Haitian earthquake victims to elect to claim an itemized charitable deduction on their 2009 tax return (instead of having to wait until next year to claim the deductions on their 2010 tax return). The election would apply only to Haitian relief contributions made in cash after Jan. 11, 2010, and before Mar. 1, 2010. If the election is made, Haiti relief donations would be deductible on the 2009 return, not the 2010 return. The bill also would relieve recordkeeping requirements for Haitian relief contributions. For these contributions, a telephone bill would satisfy the Code Sec. 170(f)(17) recordkeeping requirements if it shows the name of the donee organization, the date of the contribution, and the amount of the contribution.

This new Internal Revenue Code authorizes a credit of up to $7,500 per vehicle for qualifying plug-in electric drive motor vehicles. This notice provides interim guidance, pending the issuance of regulations, on:

 (1) the certification rules for domestic manufacturers and domestic distributors of foreign manufacturers, and

(2) the circumstances when purchasers of qualified plug-in electric drive motor vehicles can rely on the certification in determining whether a credit is allowable with for a vehicle and the amount of the credit for the vehicle.

 See www.irs.gov/businesses/article/0,,id=214841,00.html for a list of manufacturers for vehicles acquired on or before 12/31/09 and complete guidelineson the new credit.

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.

Each year on October 15, the Ohio Tax Commissioner is required to calculate the interest rate that applies in the following year. Currently, the rate is set at 5%. This will drop to 4% for calendar year 2010. This rate applies to underpayments and overpayments of the commercial activity tax, corporate, sales and use, personal and most other taxes. The monthly accrual rate is 0.33%. The rate on estate taxes and tangible personal property taxes will drop to 1% from the current 2%. The monthly accrual rate is 0.08%. ( Ohio Tax Commissioner Journal Entry 10-15-2009, 10/15/2009 .)

From the IRS:

The American Recovery and Reinvestment Act provides tax incentives for first-time homebuyers, people purchasing new cars, those interested in making their homes more energy efficient, and parents and students paying for college.

Here are six things the IRS wants you to know about ARRA tax incentives for individuals:

1. First-Time Homebuyer Credit Taxpayers who haven’t owned a principal residence during the past three years prior to the purchase date of a home before Dec. 1 of this year may be eligible to receive a credit of up to $8,000 on an original or amended 2008 tax return. They can also wait and claim the credit on their 2009 return.

2. New Vehicle Purchase Incentive Qualifying taxpayers can deduct the state and local sales and excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles. The deduction per vehicle is limited to the tax on up to $49,500 of the purchase price of each qualifying vehicle and phases out for taxpayers at higher income levels.

3. Making Work Pay and Withholding The Making Work Pay Credit lowered employees’ tax withholding rates this year and has already put more money into the pockets of wage earners. Self-employed individuals will have an opportunity to claim this credit when they file their 2009 return. Taxpayers who fall into any of the following groups should review their tax withholding rates to ensure enough tax is currently being withheld: multiple job holders, families in which both spouses work, workers who can be claimed as dependents by other taxpayers, workers without a valid social security number, some social security recipients who work and pensioners. Failure to adjust your withholding in these situations could result in potentially smaller refunds or in limited instances may cause you to owe tax rather than receive a refund next year.

4. Tax Credit for First Four Years of College The American Opportunity Credit can help parents and students pay part of the cost of the first four years of college. The new credit modifies the existing Hope Credit for tax years 2009 and 2010, making it available to a broader range of taxpayers. Eligible taxpayers may qualify for the maximum annual credit of $2,500 per student.

5. Certain Computer Technology Purchases Allowed for 529 Plans ARRA adds computer technology to the list of college expenses that can be paid for by a qualified tuition program, commonly referred to as a 529 plan. For 2009 and 2010, the law expands the definition of qualified higher education expenses to include expenses for computer technology and equipment or Internet access and related services.

6. Energy-Efficient Home Improvements The credit for nonbusiness energy-efficient improvements is increased for homeowners who make qualified improvements to existing homes. Qualifying improvements include the addition of insulation, energy-efficient exterior windows and energy-efficient heating and air conditioning systems.

For more information on this and other key tax provisions of the Recovery Act, visit the official IRS Website at IRS.gov/Recovery.

Links:

• The American Recovery and Reinvestment Act of 2009: Information Center

The IRS launched a YouTube video site and an iTunes podcast site to help taxpayers take full advantage of the tax provisions in the 2009 American Recovery and Reinvestment Act. The IRS YouTube channel will debut with seven videos in English and American Sign Language and eight in Spanish, featuring such topics as the $8,000 first-time homebuyer’s credit, the sales or excise tax deduction on new car purchases, and the expanded credits for education and energy conservation. Also, included will be a video on using the IRS Withholding Calculator. People can visit the audio site at iTunes to listen to IRS podcasts about Act’s tax credits, or listen to those same podcasts in English and Spanish at the Multimedia Center on www.irs.gov . News Release IR-2009-76 .

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