WWW.MEDOWSCPA.COM Business &#38; Tax Blog &#187; accountant new york city

A Unique, Boutique New York CPA Firm Serving the Needs of Individuals & Small Businesses

New York Income Tax Business and Nonbusiness Bad Debts

admin — Wed, 25 Aug 2010 12:00:17 +0000

It is virtually inevitable that all of us will at one time or another incur financial losses in our small business and personal lives. One frequently occurring type of loss that affects many Manhattan LLCs, S-corps, freelancers and small businesses in NYC is a bad debt. Whether made in the course of business, or to a friend or relative, sometimes a loan simply cannot be repaid despite the best intentions of the debtor, and if there is little or no prospect that repayment can be made in the future you may have a bad debt. From a tax standpoint, the question is how to handle bad debts, and what steps to take to at least derive the maximum tax benefits available from them. Although this subject is fraught with complexities, our New York small business CPAs will outline the basic principles here to give you an idea as to whether the bad debt rules may apply to you.

The first step is ascertaining that a real debt exists. There must be a valid and legally enforceable obligation to pay you a fixed or “determinable” sum of money. Loans between family members, or other related parties such as New York City s-corporations and their shareholders, are particularly scrutinized to make sure that they are really debts rather than disguised gifts, dividends, or contributions to the corporation’s capital. Therefore, if you are contemplating a loan to a related party, you must ensure that you treat the transaction as a true loan by taking the steps that an arm’s-length lender would take, such as putting it in writing and charging a reasonable rate of interest.

It then must be determined if, and when, the debt has become totally or partially worthless, that is, a bad debt. The problem here is that the IRS often requires taxpayers to play a guessing game. If a taxpayer claims a bad debt loss when nonpayment is only probable, rather than a virtual certainty, the IRS may disallow the loss as premature because there is some possibility of repayment in a later year. On the other hand, if the taxpayer waits until repayment is clearly hopeless, the IRS may maintain that the debt was really worthless in an earlier year and the loss should have been taken then. Because of potential statute of limitations problems, we generally recommend that the loss be claimed in the earliest possible year that it can reasonably be argued to be worthless. There are a number of facts which might indicate worthlessness, including the debtor’s bankruptcy, but no one of them is decisive; it is the totality of circumstances that is determinative.

Once it is established that a bad debt exists in your NYC small business, LLC or s-corp, the business or nonbusiness nature of the debt decides the outcome. As you might expect, a business bad debt must be created or acquired, or become worthless, in the course of your trade or business. If you conduct a business in the form of a s-corporation in New York, generally any debt held by the corporation is a business debt. Any debt not falling into the business category is a nonbusiness debt. A nonbusiness debt must be completely worthless before a loss can be taken, whereas a loss on a business bad debt can be taken when partial worthlessness can be established. Furthermore, nonbusiness bad debts are subject to the limitations on capital losses. Business bad debts, on the other hand, are deductible as ordinary losses in full against your other income.

As we said above, this is a complex topic and the preceding discussion can give only a rudimentary overview of all of the tax rules involved. If you are, or may be in a situation where these rules could affect your LLC, S-corp or Freelancer income taxes in New York, please do not hesitate to contact our Manhattan small business CPAs.

Jonathan Medows, CPA

MEDOWS CPA, PLLC

A Unique, Boutique New York CPA Firm Serving the Needs of Individuals & Small Businesses

Deducting the Cost of Computer Software for a small business in New York

admin — Mon, 23 Aug 2010 12:00:12 +0000

Dear Client:
Computer systems are virtually indispensable in a wide variety of small businesses, and an increasingly expensive component of these systems is the software. Therefore, here’s a quick review of how you may be able to write off the software expenses you incur in your Manhattan small business or LLC on your New York corporation taxes.

If the software is included in the purchase price of the computer itself, it generally does not have to be broken out separately on your New York City small business, LLC or corporation income taxes. The entire cost of the machine and the software it comes with may be depreciated over five years, or expensed in full in one year, subject to the annual limit, generally $250,000 for 2010 (and scheduled to drop to $25,000 after 2010). The $250,000 amount is the same as it was in 2009, extended by Congress in the Hiring Incentives to Restore Employment (HIRE) Act of 2010. These annual expensing caps, however, apply to the total of all expensed property you begin to use in your business for any designated year, just not computers or software. What’s more, if a business purchases more than $800,000 of qualifying property in 2010 (also the same as in 2009), the total dollar amount that may be expensed starts to be “phased out.”

Another tax tip: While a computer and software package must be depreciated over five years, the software component can usually come within rules that allow a faster three-year write off on your corporation taxes in NYC, if the price is stated separately.

If you have bought additional software, it is fully deductible in the year of purchase if it has a useful life of one year or less. This may apply, for example, to software that is upgraded annually or for which a new edition must be issued each year for the user to stay current.

Bonus depreciation was not extended into 2010. Thus, if your business does not qualify for full first-year Code Sec. 179 expensing because it exceeds the $800,000 qualifying limit for 2010, there is no depreciation deduction to turn to this year write-off those hefty expenses upfront.

Even if the software isn’t “off-the-shelf” because it has been designed or specifically modified for you, or you have an exclusive license to use it, it can be written off over three years on your small business, LLC or corporation taxes in New York if it was bought for use in your regular business, and was not obtained as part of acquiring another business. However, if the software is customized and was received in a business acquisition, the cost of the software must be amortized over 15 years. Note that the type of “software” that must be amortized over 15 years generally does not include databases, unless the database is in the public domain and is incidental to the operation of deductible computer software.

Please contact one of our Manhattan small business CPAS to determine whether you are eligible for the depreciation bonus with respect to a software purchase on your corporate income taxes in NYC .

If instead of buying “off-the-shelf” or customized software, a business writes or develops its own software internally, the research and development costs can be written off currently, or can be written off over five years or any shorter useful life that can be clearly established. This is true whether or not the software is patented or copyrighted, and whether or not you also sell it to others. But if you choose to fully deduct these costs, generally you must do so consistently each year.

Please do not hesitate to contact our team of small business CPAs in New York to see how best to handle your past as well as present software purchases on your NYC corporation income tax return.

Jonathan Medows, CPA

MEDOWS CPA, PLLC

A Unique, Boutique New York CPA Firm Serving the Needs of Individuals & Small Businesses

Freelancer and Self-employed Tax Savings

admin — Fri, 20 Aug 2010 12:00:40 +0000

Upon reviewing many of our client’s New York tax return information, our team of Manhattan freelancer CPAs have determined that many of our clients are involved in the entertainment industry as a creative talent, and may be concerned about self-employed and freelancer tax savings in NYC. Tax saving strategies for those in the New York City entertainment professions involves developing plans to maximize business-related deductions and, possibly, deferral of income. In addition, under certain circumstances, it is advisable to form a “loan-out” corporation that contracts with third-parties for work performed by the owner-employee.

We believe that a thorough analysis and discussion of these New York freelancer tax saving opportunities will provide you with self-employed tax benefits. Please contact our team of Manhattan freelancer CPAs at your earliest opportunity to arrange for a meeting to discuss how we can help you get the most freelancer self-employed tax savings in NYC.

Jonathan Medows, CPA

MEDOWS CPA, PLLC

A Unique, Boutique New York CPA Firm Serving the Needs of Individuals & Small Businesses

Convenience Fees for NYC Income Tax Payments by Credit and Debit Cards May be Deductible

admin — Wed, 18 Aug 2010 12:00:03 +0000

Our Manhattan income tax CPAs have learned that the IRS has announced that convenience fees charged for paying federal and New York individual income taxes electronically with a credit or debit card are deductible for some taxpayers who itemize. This announcement represents a change from the IRS’s previous position on the deductibility of such fees, and may have a positive affect on your income tax return in NYC.

Federal law prohibits the IRS from paying fees to service providers for credit and debit card transactions. Therefore, service providers generally charge taxpayers a convenience fee for paying their federal income tax with a credit or debit card. Convenience fees average 2.5 percent of the amount of the payment. According to the IRS, more than four million taxpayers paid their tax electronically in 2008.
If you were charged these fees when you paid the balance due on last year’s New York City income tax return, or when you paid your estimated tax payments for the current year, you may be able to deduct the fees. The convenience fees are deductible as a miscellaneous itemized deduction subject to two percent of adjusted gross income.

Therefore, in order to deduct the convenience fees, taxpayers must be eligible to file Schedule A of Form 1040 to itemize their deductions, and also have enough miscellaneous expenses to exceed 2 percent of their adjusted gross income. Fees are deductible in the year they are paid.

If you have any question on whether or not you may take the deduction on your income tax return in Manhattan, or on your tax liability in general, please call our office of New York income tax CPAs at your earliest convenience.

Jonathan Medows, CPA

MEDOWS CPA, PLLC

A Unique, Boutique New York CPA Firm Serving the Needs of Individuals & Small Businesses

New York Income Tax Update: Closing Deadline Extended to Sept. 30 for Eligible Homebuyer Credit Purchases

admin — Sun, 15 Aug 2010 12:00:30 +0000

Our team of income tax CPAs in Manhattan would like you to know that eligible taxpayers who contracted to buy a home, qualifying for the first-time homebuyer credit, before the end of April now have until Sept. 30, 2010 to close the deal, according to the Internal Revenue Service.

The Homebuyer Assistance and Improvement Act of 2010, signed by the President today, extended the closing deadline from June 30 to Sept. 30 for any eligible homebuyer who entered into a binding purchase contract on or before April 30 to close on the purchase of the home on or before June 30, 2010. The new law addresses concerns that many homebuyers might be unable to meet the original June 30 closing deadline.

The IRS reminds taxpayers that special filing and documentation requirements apply to anyone claiming the homebuyer credit on their income taxes in NYC. To avoid refund delays, those who entered into a purchase contract on or before April 30, but closed after that date, should attach to their return a copy of the pages from the signed contract showing all parties’ names and signatures if required by local law, the property address, the purchase price, and the date of the contract.
Besides filling out Form 5405, First-Time Homebuyer Credit and Repayment of the Credit, all eligible homebuyers must also include with their return one of the following documents:
•   A copy of the settlement statement showing all parties’ names and signatures if required by local law, property address, sales price, and date of purchase. Normally, this is the properly executed Form HUD-1, Settlement Statement.
•   For mobile home purchasers who are unable to get a settlement statement, a copy of the executed retail sales contract showing all parties’ names and signatures, property address, purchase price and date of purchase.
•   For a newly constructed home where a settlement statement is not available, a copy of the certificate of occupancy showing the owner’s name, property address and date of the certificate.

Besides providing a tax benefit to first time homebuyers and purchasers who haven’t owned homes in recent years, the law allows a long-time resident of the same main home to claim the credit if they purchase a new principal residence. To qualify, eligible taxpayers must show that they lived in their old homes for a five-consecutive-year period during the eight-year period ending on the purchase date of the new home. Homebuyers claiming this credit on their income tax return in New York City can avoid refund delays by attaching documentation covering the five-consecutive-year period:
•   Form 1098, Mortgage Interest Statement, or substitute mortgage interest statements,
•   Property tax records or
•   Homeowner’s insurance records.
There are three options for claiming the credit on a qualifying 2010 purchase:
•   If a 2009 return has not yet been filed, claim it on Form 1040 for tax-year 2009. Though these returns cannot be filed electronically, taxpayers can still use IRS Free File to prepare their return. The returns must be printed out and sent to the IRS, along with all required documentation. The IRS urges taxpayers claiming refunds to choose direct deposit.
•   If a 2009 return has already been filed, claim it on an amended return using Form 1040X.
•   Whether or not a 2009 return has been filed, wait until next year and claim it on a 2010 Form 1040.
•
If you have any questions about the Homebuyer tax credit, our team of New York income tax CPAs are here to help you.

Jonathan Medows, CPA

MEDOWS CPA, PLLC

A Unique, Boutique New York CPA Firm Serving the Needs of Individuals & Small Businesses

2010 Planning: Retirement Saving for Individuals in New York

admin — Fri, 13 Aug 2010 12:00:26 +0000

Now is a good time to evaluate your retirement savings position with a view towards maximizing your retirement assets and investments. The tax code provides significant incentives for individuals in New York City to make contributions to retirement savings and plans, including traditional and Roth IRA’s, as well as employer sponsored qualified and non-qualified plans, including qualified 401(k) plans. A saver’s credit may also be available for investors in certain tax brackets, which further enhances overall savings. There have been numerous changes in the laws designed to make it easier for individuals to save for retirement. Our team of CPAs are familiar with all of the individual tax laws in Manhattan and will be able to assist you.

NYC individual tax incentives can include deductibility of certain contributions, tax deferral on growth of assets in the plan, and potential distribution free of tax, varying on the investment vehicle chosen. The choice of investment that may be best for you depends upon your New York City individual tax and overall financial situation. Regardless of the type of contribution, any contribution should be made as early in the year as possible. If this approach is followed consistently over the years, the benefits will be far greater than contributions made at the last minute.
Please call our individual tax CPAs in New York to discuss your retirement savings situation and strategy. The rules applicable to the types of investment vary and can be complex. Our Manhattan income tax CPAs will be happy to help you maximize your individual tax benefit and overall savings.

Jonathan Medows, CPA

MEDOWS CPA, PLLC

A Unique, Boutique New York CPA Firm Serving the Needs of Individuals & Small Businesses

Understanding Small Business S-corporation Income Taxes in New York

admin — Thu, 12 Aug 2010 12:00:02 +0000

Dear Client:
Our Manhattan CPAs know that an S corporation such as yours is a pass-through entity that is treated very much like a partnership for federal and NYC income tax purposes. As a result, all income is passed through to your shareholders and taxed at their individual Manhattan tax rates. However, unlike a C corporation, a New York City S corporation’s income is taxable to the shareholders when it is earned whether or not the corporation distributes the income. Because an S corporation has a unique tax structure that directly impacts shareholders, it is important for you to understand the S corporation distribution and loss limitations, as well as how and when items of income and expense are taxed, before developing your overall tax plan.Our team of Manhattan small business CPAs can help you understand these S-corporation tax rules in New York.
In addition, some Manhattan S corporation income and expense items are subject to special rules and separate identification for New York income tax purposes. Examples of separately stated items that could affect a shareholder’s tax liability include charitable contributions, capital gains, Sec. 179 expense deductions, foreign taxes, and net income or loss related to rental real estate activities.

These items, as well as income and losses, are passed through to the shareholder on a pro rata basis, which means that the amount passed through to each shareholder is dependent upon that shareholder’s stock ownership percentage. However, a shareholder’s portion of the losses and deductions may only be used to offset income from other sources to the extent that the total does not exceed the basis of the shareholder’s stock and the basis of any debt owed to the shareholder by the corporation. The S corporation losses and deductions are also subject to the passive-activity rules.

Other key points to consider when developing your comprehensive tax strategy include:
•   the availability of the Code Sec. 179 deduction at the corporate and shareholder level;
•   reporting requirements for the domestic production activities deduction;
•   the tax treatment of fringe benefits;
•   below-market loans between shareholders and S corporations; and
•   IRS scrutiny of distributions to shareholders who have not received compensation.

If you need a CPA for your S-ecorporation in New York, we can assist you in identifying and maximizing your potential NYC small business income tax savings. Please call one of our Small business CPAs in Manhattan at your earliest convenience to arrange an appointment.

Jonathan Medows, CPA

MEDOWS CPA, PLLC

A Unique, Boutique New York CPA Firm Serving the Needs of Individuals & Small Businesses

Independent Contractor vs. Employee Part 1

admin — Wed, 11 Aug 2010 12:00:56 +0000

Currently, the likelihood of your NYC small business being involved in a worker classification or employment tax audit is increased because the IRS is aggressively attempting to reduce the “tax gap,” which is the annual shortfall between taxes owed and taxes paid. Employment tax noncompliance is estimated by the IRS to account for approximately $54 billion of the tax gap. Under-reporting of FICA makes up $14 billion; under-reporting of self-employment tax accounts for $39 billion; and under-reporting of unemployment tax accounts for $1 billion in lost revenue. Our Manhattan S-corporation CPAs know that this may affect many LLCs, S-corps, and other Small Businesses in New York City.

As a result of the Questionable Employment Tax Practice (QETP) initiative, in 2007 the IRS entered into agreements with workforce agencies in 29 states to share the results of employment tax examinations. These agreements provide a centralized, uniform means for the IRS and state employment officials to encourage compliance with federal and state employment tax requirements. In addition, for the 2008 through 2010 tax years, the IRS plans to examine 6000 randomly selected employers’ Forms 941, Employer’s Quarterly Federal Tax Return, as part of the National Research Program (NRP). This means that now more than ever your New York small business needs CPA who specializes in S-corporations and LLCs in Manhattan.

Because the existing worker classification rules are complex and ambiguous, much uncertainty surrounds their interpretation and application. The lack of a single, definitive test for classifying workers as either employees or independent contractors contributes significantly to the worker classification problem, and this could very well affect your small business in New York.

Therefore, understanding the difference between an employee and an independent contractor is very important. If you are an employer, you are required to withhold and contribute a matching amount of FICA and Medicare taxes from your employee’s income. However, if your workers are independent contractors, you are only required to report payments of $600 or more on a Form 1099-MISC (Miscellaneous Income). Our small business CPAs in Manhattan know that failing to make the right classification could cost your NYC s-corporation or LLC lots of money.

If you have workers who make substantial financial investments in tools, equipment, or a place to work, or undertake some entrepreneurial risks, they are probably independent contractors. However, when you control and direct the workers who perform services for you as to the end result and how it will be accomplished, you are probably involved in an employer-employee relationship.
Unless there is a reasonable basis for treating your employees as independent contractors, failing to withhold New York income and employment taxes from their wages can result in severe penalties and interest, in addition to the back taxes owed. Of course, penalties for intentional worker misclassifications are harsher than they are for inadvertent mistakes.

Your benefit plan may also be in jeopardy if any eligible employees have been misclassified as independent contractors. Since these employees have been excluded from plan participation, your retirement plan may lose its tax-favored status. The problem is compounded when excluded employees seek restitution for lost benefits not only due to their exclusion from the benefit plan, but also for health coverage and other employee benefits.

Since the potential liability is considerable, we feel that it would be beneficial for you to verify that your workers are properly classified by meeting with our team of S-corporation CPAs in Manhattan. It is also important that your employment tax records are in compliance with IRS guidelines, especially in the event of an audit. Please contact our team of small business CPAs in New York at your earliest convenience to make an appointment.

Jonathan Medows, CPA

MEDOWS CPA, PLLC

A Unique, Boutique New York CPA Firm Serving the Needs of Individuals & Small Businesses

Hiring Incentives to Restore Employment Act – In General

admin — Fri, 06 Aug 2010 12:00:08 +0000

To help jumpstart NYC small business hiring and spending, Congress passed, and President Obama signed the Hiring Incentives to Restore Employment (HIRE) Act of 2010. The HIRE Act provides for payroll tax forgiveness and an employer tax credit of up to $1,000 for qualified new hires made by LLCs, S-corporations, C-corporations and other small businesses in Manhattan. The HIRE Act also extends enhanced Code Sec. 179 small business expensing and makes some enhancements to tax credit bonds. These measures are paid for, in part, by comprehensive reforms to the reporting and disclosure of accounts in foreign financial institutions, a further delay in implementation of worldwide allocation of interest and an acceleration of certain corporate estimated income tax payments.
Payroll tax forgiveness. The HIRE Act provides qualified small businesses in New York with temporary payroll tax forgiveness of the employer’s 6.2 percent share of Social Security payroll taxes on wages paid to new hires who had been previously unemployed. Payroll tax forgiveness is effective for qualified employees on wages earned for work after March 18, 2010 and on or before December 31, 2010. A qualified employee must begin work any time after February 3, 2010 and before January 1, 2011. The employer generally must be a private sector for-profit or tax-exempt employer (with some limited exceptions).

The newly hired worker must not have been employed for more than 40 hours during the 60-day period ending on the date that the individual begins employment. Additionally, the newly hired employee cannot displace a worker who is currently on the employer’s payroll unless the worker voluntarily separated from employment or was separated from employment for cause. Newly hired individuals who are related to the employer or who own (directly or indirectly) more than 50 percent of the business are ineligible. A qualified individual may be hired for any number of hours, full-time or part-time, since the benefits to the employer are tied only to 6.2 percent of any salary paid.

The HIRE Act requires that individuals certify they have not been employed for more than 40 hours during the 60-day period ending on the date they begin employment. The IRS has developed a new form, Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit.

Let’s look at an example of payroll tax forgiveness and how it would affect small businesses, LLCs and S-corps in New York city:

ABC Co. hires Jean on January 25, 2010 as a full-time employee working 40 hours each week. ABC hires Luis on February 15, 2010 as a full-time employee working 40 hours each week. ABC hires Sam on March 1, 2010 as a full-time employee working 40 hours each week. Jean, Luis and Sam all certify that they had not been employed for more than 40 hours during the 60-day period ending on the date that they began employment with ABC Co. However, Jean is not a qualified employee for purposes of payroll tax forgiveness under the HIRE Act because her hire date is before February 4, 2010. Luis and Sam are qualified employees for purpose of payroll tax forgiveness because their hire dates are after February 3, 2010.
Keep in mind that the HIRE Act’s payroll tax forgiveness applies only to the employer’s share of Social Security taxes. NYC small businesses remain liable for Medicare payroll taxes. The worker also must pay his or her share of Social Security taxes as well as federal and New York income taxes. Additionally, a qualified employer may not claim the Work Opportunity Tax Credit (WOTC) for wages paid to an individual during the one-year period beginning on the hire date for the same wages used to qualify for the forgiveness of payroll tax.

The HIRE Act also provides that the direct payroll tax holiday will not apply to wages paid during the first calendar quarter of 2010. Instead, whatever tax holiday amount would have been allowed for first quarter 2010 will instead be credited against the employer’s general OASDI liability for the second quarter of 2010. Beginning for any new-hire wages paid starting April 1, a New York LLC or other employer takes direct OASDI forgiveness into account in depositing payroll taxes under the regular deposit rule applicable to that employer.

Retained worker business credit. Under the HIRE Act, employers that hire new workers who qualify for payroll tax forgiveness may also be eligible for a New York income tax credit for each qualified employee. For the employer to be entitled to this new credit, the qualified employee must be retained on the employer’s payroll for 52 consecutive weeks. The business credit under Code Sec. 38 will be increased, with respect to each qualified retained worker, by the lesser of $1,000 or 6.2 percent of wages paid by the taxpayer to the qualified retained worker during the 52 week period.

A qualified retained worker must be paid an amount equal to at least 80 percent of his first 26 weeks of wages during the last 26 weeks of the 52-week qualifying period. The HIRE Act excludes wages earned by a domestic worker or an individual eligible for the foreign earned income exclusion.

If you have any questions about payroll tax forgiveness or the retained worker business credit and how it applies to your LLC, S-corp or other small business taxes in NYC, please contact our CPAs for more details.

Expensing. Under Code Sec. 179, New York City small businesses can elect to recover all or part of the cost of qualifying property, up to a limit, by deducting it in the year it is placed in service. Before the HIRE Act, Code Sec. 179 expensing for 2010 was limited to $125,000 with a $500,000 cap (both amounts adjusted for inflation). The HIRE Act raises the dollar limit to $250,000 and the cap to $800,000 (the same amounts in place in 2009). Under the HIRE Act, write-offs can be taken under phaseout rules until qualified purchases reach $1,050,000. The HIRE Act applies to qualified purchases made in tax years beginning after December 31, 2009 and before January 1, 2011. The HIRE Act also provides that off-the-shelf computer software, a popular business purchase, is Code Sec. 179 property.

Tax credit bonds. The American Recovery and Reinvestment Act of 2009 (2009 Recovery Act) created the new Build America Bond program, which authorizes state and local governments to issue Build America Bonds. These are taxable bonds issued in 2009 and 2010 to finance any capital expenditures for which state and local governments could issue tax-exempt governmental bonds. At the election of the state or local government, the U.S. Treasury will make a direct payment to the issuer in an amount equal to 35 percent of the interest payment on Build America Bonds. This feature is designed to provide a federal subsidy for a larger portion of the borrowing costs of state and local governments than traditional tax-exempt bonds.

The HIRE Act allows issuers of existing tax credit bonds to treat bonds issued after March 18, 2010 as Build America Bonds. Consequently, issuers would qualify for the direct subsidy under Build America Bonds. Some of the tax credit bonds that may qualify include renewable energy bonds, qualified energy conservation bonds, qualified zone academy bonds, and qualified school construction bonds.

Foreign accounts. The Bank Secrecy Act requires taxpayers to report if they have a financial interest in, signature authority or other authority over one or more accounts in a foreign country, and the value of the account exceeds $10,000 at any time during the calendar year. The Bank Secrecy Act does not prohibit taxpayers from owning a foreign bank account. It just requires reporting and disclosure. The rules apply to all citizens and residents of the U.S. as well as domestic corporations, estates, partnerships, and trusts.

The HIRE Act imposes additional reporting and disclosure requirements on taxpayers and financial institutions. Generally, individuals with accounts in foreign financial institutions must disclose on their federal tax returns the name of the financial institution, the account number and the maximum value of the asset during the tax year. The aggregate value of the foreign financial assets must exceed $50,000 for the disclosure requirements to apply. The HIRE Act provides penalties for failing to disclose. The penalties range from a low of $10,000 to a high of $50,000. A 40 percent penalty will apply to the portion of any underpayment attributable to an undisclosed foreign financial asset.

Foreign financial institutions will also be subject to heightened reporting requirements. Generally, foreign financial institutions will be required, among other things, to report the name, address and tax identification number (TIN) of each account holder who is a specified U.S. person. The HIRE Act also will require withholding agents — starting after 2012 — to withhold 30 percent of certain payments to foreign financial institutions that do not agree to the new reporting requirements.

Along with the heightened reporting and disclosure measures, the HIRE Act also increases the statute of limitations to six years for failure to report certain offshore transactions and income. The HIRE Act also clarifies when a foreign trust is considered to have a U.S. beneficiary and addresses the treatment of substitute dividends and dividend equivalent payments.

The foreign account compliance measures in the HIRE Act are very complex. The IRS is expected to issue guidance on the measures. Please contact our team of Manhattan small business CPAs if you have any questions about the foreign account compliance provisions in the HIRE Act and how it may affect your New York LLC.
Worldwide allocation of interest. Qualified New York small businesses may elect to take advantage of a rule for allocating interest expense between U.S. sources and foreign sources for purposes of determining a taxpayer’s foreign tax credit limitation. Implementation of worldwide allocation of interest was enacted in 2004 but has been delayed several times. The HIRE Act further delays implementation to tax years beginning after 2020.

Corporate estimated income taxes. Generally, a corporation is required to make quarterly estimated payments of income tax during its tax year. The HIRE Act increases the estimated payment required to be made by corporations with assets of $1 billion or more in July, August or September of 2014, 2015 and 2019 with proportional reductions for the respective subsequent installment periods.
Pending legislation. Congress continues to debate several other bills designed to stimulate economic growth. Pending bills include a package of extenders. These are popular but temporary tax breaks, which generally expired at the end of 2009. Congress is also debating an extension of COBRA premium assistance, which provides a subsidy to qualified individuals to help offset the cost of COBRA continuation coverage. Also waiting for passage in Congress is an extension of the federal estate tax, which expired for decedents dying after December 31, 2009. Several retirement and pension bills are also pending. Additionally, Congress has to approve a fiscal year (FY) 2011 budget for the IRS. The Obama administration has also asked Congress to increase the IRS’s funding for enforcement, compliance and customer service.

If you have any questions about the HIRE Act or pending legislation and how it may affect your NYC S-corp, LLC or other Manhattan small business, please contact one of our small business CPAs.

Jonathan Medows, CPA

MEDOWS CPA, PLLC