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2010 Second Quarter Federal and New York Income Tax Developments

admin — Sun, 22 Aug 2010 12:00:36 +0000

Dear Client:
During the second quarter of 2010, there were many important federal and New York income tax changes. This letter highlights some of the more important federal tax developments for you. As always, please give our team of Manhattan income tax CPAs a call or send us an email if you have any questions about these income tax changes.

Tax legislation. Congress recessed for its Independence Day holiday without passing a tax extenders bill and a small business tax relief bill. The House approved versions of both bills earlier in 2010 but the bills stalled in the Senate over their price tags. The American Jobs and Closing Tax Loopholes Act (H.R. 4213) would extend over 40 temporary individual, business, charitable, energy, and infrastructure tax incentives that mostly expired at the end of 2009. The Small Business Jobs Tax Relief Act of 2010 (H.R. 5486) would, among other things, provide Code Sec. 6707A penalty relief to small businesses and increase the Code Sec. 195 deduction for qualified start-up expenses. Congress did, however, pass two smaller bills that will change your NYC income taxes: the Homebuyer Assistance Improvement Act of 2010 (H.R. 5623) and the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (H.R. 3962). The homebuyer act extends the closing date deadline from June 30, 2010 to September 30, 2010 for homebuyers who signed sales contracts prior to May 1, 2010. The pension relief act includes a package of defined benefit pension funding relief measures. The homeowner act is offset, by among other things, by extension of the Code Sec. 6657 bad check penalty to electronic payments.

Health care reform. The IRS issued significant guidance on various provisions of the new health care reform package (the Patient Protection and Affordable Care Act (PPACA) and the Health Care and Education Reconciliation Act of 2010) enacted earlier this year, both of which may affect your Manhattan income taxes. The IRS issued taxpayer-friendly guidance on the new extended exclusion from income for employer-provided health insurance for any employee’s child who has not attained age 27 as of the end of the tax year. For most individuals, this is the calendar year. The IRS also issued temporary and proposed regulations implementing the new requirement that health insurance plans that provide coverage for children continue to make such coverage available until the child turns 26 years of age. The IRS also issued temporary and proposed regulations under which health insurance plans will be treated as grandfathered plans under the PPACA. Additionally, the IRS described notice requirements that grandfathered plans must give to participants and beneficiaries.

Small employer health insurance tax credit. Another New York City income tax change: the IRS and the Department of Health and Human Services (HHS) issued a key component of the new Code Sec. 45R small employer health insurance tax credit. The agencies released the average premium for the small group market in each of the 50 states for the 2010 tax year. The IRS also issued guidance clarifying eligibility for the Code Sec. 45R credit, premiums, coverage, state tax credits, and more.

Form 990 filing deadline. An exempt organization required to file and failing to file for three consecutive years automatically loses its federal tax-exemption status. Form 990 is due on the 15th day of the fifth month after an organization’s fiscal year ends. For calendar-year organizations, the date was Monday, May 17, 2010, since May 15th fell on a Saturday this year. Exempt organizations could request an extension to file Form 990 by filing Form 8868, Application for Extension of Time To File An Exempt Organization Return, by the original due date. The IRS cautioned that many small tax-exempt organizations failed to file the required information return in time. Very small tax-exempt organizations must file Form 990-N (also known as the “e-Postcard”). The IRS indicated that it will provide additional guidance on how these small tax-exempt organizations can maintain their tax-exempt status even if they missed the May 17, 2010 deadline.
Basis overstatement. The Tax Court, in a court-reviewed decision, invalidated the IRS’s temporary and proposed regulations extending the limitations period for partnership assessments based on omissions of income. The court found the regulations contrary to the Supreme Court’s decision in Colony, Inc., 58-2 ustc P. 9593 .

Wrongful death payments. The IRS determined that a survivor could exclude from income a payment received for the wrongful death of another, including claims for emotional distress. The payment was intended to provide compensation for wrongful death and personal injury including the resulting claim for emotional distress.

Tax accrual workpapers. In a controversial move, the U.S. Supreme Court declined to review the decision of the Court of Appeals for the First Circuit allowing the IRS access to a corporation’s tax accrual workpapers. The First Circuit in Textron Inc. v. U.S., 2009-2 ustc P. 50,574 found that the work product privilege did not protect tax accrual workpapers.

HIRE Act payroll tax forgiveness. The IRS unveiled a revised Form 941, Employer’s Quarterly Federal Tax Return, and its instructions to reflect payroll tax forgiveness under the Hiring Incentives to Restore Employment (HIRE) Act.

Tax Court e-filing. Beginning with petitions filed on or after July 1, 2010, taxpayers represented by counsel must file all documents with the U.S. Tax Court using the court’s electronic filing (e-filing) system. The requirement brings the Tax Court into conformity with e-filing policies applicable to other federal courts.

401(k) compliance project. The IRS’s Employee Plans Compliance Unit (EPCU) launched a compliance check on 401(k) plans by sending a comprehensive questionnaire to a random sample of 1,200 plans. The IRS intends to use the information from the compliance checks to obtain a comprehensive view of 401(k) plans, which the agency can then use to focus its 401(k) education, outreach, guidance and enforcement efforts. As information is obtained, the IRS will focus on compliance problems. The project is designed to determine potential compliance issues, gain a better understanding of the reasons for noncompliance, and determine any potential plan operational issues. The survey includes more than 60 basic questions.

SSN and back-up withholding. Due to a change in practice by the Social Security Administration (SSA), the IRS amended the method required for recipients of interest, dividends, and other reportable amounts to validate their Social Security Number (SSN) with the payor of those amounts. As a result of the new procedure, recipients of a second “B notice” from a payor indicating that their SSN is incorrect must obtain a Social Security Number Printout from their local SSA office. Payee recipients of second B notices can no longer request the SSA to send Form SSA-7028 to the payor to validate the payee’s SSN. Instead, the payee must obtain a Social Security Number Printout and send a copy to the payor.

Registered domestic partnerships. In a series of memoranda, IRS Chief Counsel concluded that registered domestic partners in California must each report one-half of the community property income on their separate federal income tax returns. The determination applies for tax years beginning after December 31, 2006, and applies to compensation as well as income from property, such as investment income from community assets.

FICA student exception. The U.S. Supreme Court decided to take up the long-standing dispute between medical schools and the IRS over the treatment of medical residents for FICA tax purposes. The Supreme Court has agreed to hear an appeal from a 2009 case, Mayo Foundation for Medical Education and Research, CA-8, 2009-1 ustc P. 50,432 . In that case, the Court of Appeals for the Eighth Circuit upheld the IRS’s final regs in T.D. 9167, which generally provide that full-time employees are not students for purposes of the FICA student exception.
Indoor tanning tax. The IRS issued temporary and proposed regulations to implement the new 10 percent Code Sec. 5000B indoor tanning excise tax. The tax applies to amounts paid after June 30, 2010 for qualified indoor tanning services.
Whistleblower cases. The IRS posted guidelines on its web site about the investigation and processing of whistleblower claims. The guidelines reflect changes made to the whistleblower rules by the Tax Relief and Health Care Act of 2006.
Therapeutic discovery project credits. The IRS began accepting applications on newly-issued Form 8942, Application for Certification of Qualified Investments Eligible for Credits and Grants Under the Qualifying Therapeutic Discovery Project Program, from companies seeking investment tax credits or tax-free grants for therapeutic discovery projects.

These are just some of the many New York income tax changes during the second quarter of 2010. Please contact our Manhattan income tax CPAs if you have any questions about these or any income tax changes in New York.
Sincerely yours,

Jonathan Medows, CPA

MEDOWS CPA, PLLC

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

Deduction of Company Sponsored Employee Gatherings- NYC Small Business Tax Deductions for Office Parties

admin — Thu, 19 Aug 2010 12:00:34 +0000

Dear Client:
Retreats and company meetings are an important component of a successful small business and LLC in Manhattan. They are opportunities for employees and managers to come together, discuss business strategies, develop new product ideas, and plan future activities for. Retreats and other off-site meetings are increasingly an annual ritual of corporate culture. They are also expensive and New York small businesses and LLCs seek to deduct as many of the costs as possible on their income taxes in New York City.

Traditionally, the IRS has taken a very strict approach to the deductibility of expenses from NYC small business and LLC meetings. If the meeting is deemed extravagant, the costs of holding the meeting will not de deductible as ordinary business expenses and may be treated as income to the employees. The IRS takes special interest in small business meetings that are held at resorts, on cruise ships and outside the U.S. It is very good at denying these costs as excessive and small businesses and LLCs in New York do not have a good track record of prevailing in the courts. That is, until recently.

A few years ago, an encouraging case was handed down that continues to guide courts and Small businesses in NYC in determining the ability of taxpayers to effectively mix business with pleasure and deduct both. There, a federal appeals court found that a company-sponsored fishing trip to a five-star resort in Canada was a legitimate cost of doing business. The IRS had determined otherwise and a federal district court agreed. Undeterred, the small business appealed and won.
The fishing trips were a longtime company tradition. For more than 20 years, the company brought managers, sales people and factory workers from across the country to its home office for a three-day meeting. At the end of the meeting, almost all of the participants traveled, thanks to the company, to a resort in Canada for three days of fishing.

Fishing was not the only thing on the agenda. The company showed that over the three days, the participants discussed the business’ performance, its sales, activities of competitors, and brainstormed ideas for new products. Testimony also revealed that while employees were not required to attend the fishing trips, they were strongly encouraged to attend by their managers and many felt it would be disloyal to the company not to go. Some employees testified they did not like fishing.
The appeals court was convinced that the fishing trips were not corporate junkets. Even though they were all-expense paid trips to a five-star resort, employees viewed them more as mandatory company meetings than as vacations. The court allowed the company to deduct the full cost of the trips off of their NYC LLC taxes.
Of course, some of the facts were unique to the company. The appellate court even took time to note its admiration of the company’s pro-employee business philosophy. Not all employers might fit that bill. However, the decision does break with the traditional IRS approach and opens the door to challenging adverse determinations for New York LLCs and small business taxes.

Our staff of Manhattan small business tax CPAs can help you anticipate what expenses will be deductible and which expenses may be challenged on your NYC LLC income taxes. Careful planning also avoids the risk of having the costs of the meeting treated as income to your employees. So before you pack your bags, give our Manhattan small business tax CPAs a call.

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

Seven Facts about the Nonbusiness Energy Property Credit and NYC Income Taxes

admin — Mon, 16 Aug 2010 12:00:59 +0000

The following NYC income tax information is courtesy of the IRS:
Thinking about making some energy saving improvements to your home this summer? Taking some energy saving steps now may lead to bigger Manhattan income tax savings next year. The Nonbusiness Energy Property Credit, a New York income tax credit for making energy efficient improvements to homes was increased as part of the American Recovery and Reinvestment Act of 2009.

Here are seven things the IRS wants you to know about the Nonbusiness Energy

Property Credit:
1.       The new law increases the credit rate to 30 percent of the cost of all qualifying improvements and raises the maximum credit limit to $1,500 claimed for 2009 and 2010 combined.
2.       The credit applies to improvements such as adding insulation, energy-efficient exterior windows and energy-efficient heating and air conditioning systems.
3.       To qualify as “energy efficient” for purposes of this New York City income tax credit, products generally must meet higher standards than the standards for the credit that was available in 2007.
4.       Manufacturers must certify that their products meet new standards and they must provide a written statement to the taxpayer such as with the packaging of the product or in a printable format on the manufacturers’ Website.
5.       Qualifying improvements must be placed into service after December 31, 2008, and before January 1, 2011.
6.       The improvements must be made to the taxpayer’s principal residence located in the United States.
7.       To claim the credit, attach Form 5695, Residential Energy Credits to either the 2009 or 2010 NYC income tax return. Taxpayers must claim the credit on the tax return for the year that the improvements are made.

If you would like to know more about the Nonbusiness Energy Property Credit and how it could benefit your NYC Income Taxes, please contact our Manhattan CPAs.

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

Foreign Earned Income and Housing Exclusion for NYC Residents

admin — Mon, 09 Aug 2010 12:00:07 +0000

U.S. citizens and resident aliens generally pay NYC income taxes on their worldwide income regardless of where the income is earned or received. A U.S. citizen who earns income in a foreign country may also be taxed on that income by a foreign host country, thus leading to double taxation. However, a number of tax provisions provide relief from this inequity, including the foreign tax credit and deduction, the foreign earned income exclusion, and the foreign housing cost exclusion. Based on a review of your prior year’s tax information, we feel it would be beneficial for you to meet with our team of New York income tax CPAs to discuss tax planning regarding your foreign source income.

As an alternative, qualifying individuals may elect to exclude from gross income up to $91,500 (in 2010, an increase of $100 from 2009) of foreign earned income, as well as certain employer-provided housing costs. Individuals with self-employment income are also entitled to deduct certain non-employer-provided housing costs on their New York City income tax return. In order to qualify for these exclusions and deductions, an individual’s tax home must be in a foreign country and he must meet either a residence or physical presence test. A determination of whether a taxpayer qualifies is based on all the facts and circumstances including:

•   The taxpayer’s intention,
•   The length of stay in a foreign country,
•   The nature and duration of employment,
•   The establishment of a home in the foreign country, and
•   The nature, extent and reasons for temporary absences from the foreign home.

To substantiate eligibility for the foreign earned income and housing exclusion, a taxpayer must have adequate documentation. The IRS plans to improve compliance on international issues and expects to increase the use of foreign information documents and data sharing with other federal agencies. For instance, travel dates may be verified with U.S. passport information to double check what you put on you Manhattan income tax return.
NYC income tax payers may not elect to take both the foreign-earned income and housing exclusions and the foreign tax credit. Also, if a taxpayer claims the foreign earned income exclusion, the taxpayer will not qualify for the earned New York income credit for that year. The choice between the foreign earned income and housing exclusions and the foreign tax credit depends on which option more effectively reduces taxes. If the taxpayer’s foreign earned income is subject to a higher foreign income tax than his U.S. income, it is more advantageous to claim the foreign tax credit.

In selecting the more appropriate option, a taxpayer must also consider factors, such as length and certainty of stay in a foreign country. If a taxpayer working in a high tax country revokes the election, he may not take the election for five years without permission from the IRS and, therefore, would be at a disadvantage if he were transferred to a low tax country. In addition, a “stacking rule” has been added to ensure that U.S. citizens living abroad are subject to the same U.S. tax rates as individuals living and working in the United States. Thus, income that is excluded from gross income is included for determining the applicable tax rate.

Considering the complexity of issues regarding foreign earned income, it is important that our team of Manhattan income tax CPAs review either your eligibility for the foreign earned income and housing exclusion, or the possibility of revoking the election in future years for the benefit of tax credits denied. In addition, our CPAs can assist you in documenting your foreign travel and housing expenses. Please call our office at your earliest convenience to discuss your options with regard to your foreign income and NYC income tax liabilities.

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