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Small Business Income Tax News: IRS Releases 2011 Contribution Limits for HSAs

admin — Thu, 29 Jul 2010 12:00:24 +0000

Dear Client:
The following is breaking news that may affect your Manhattan corporation, LLC or small business income taxes. The IRS has released the 2011 inflation adjusted amounts that may be contributed to health savings accounts (HSAs). Contributions to HSAs are deductible on NYC LLC income taxes by determining adjusted gross income, which effectively allows New York corporations with high-deductible health insurance to make contributions on a pre-tax basis to cover health care costs. For calendar year 2011, the annual limitation on deductions for HSAs for an individual with self-only coverage under a high deductible health plan is $3,050 ($6,150 for an individual with family coverage). These are the same limits that applied for 2010.
As an individual who is eligible to participate in a health saving account or has previously reported a deduction for a HSA, you may wish to consider utilizing this tax-efficient plan for medical expenses. If you are not sure how this affects your New York City corporation income taxes, we can help.

Please contact our Manhattan small business income tax CPAs at your earliest opportunity if you would like more information about health savings accounts, how they relate to your New York LLC income taxes, your eligibility to participate and how you can get the maximum tax benefit from deductible contributions.
Sincerely yours,

Jonathan Medows, CPA

MEDOWS CPA, PLLC

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

Small Business Tax Guidance on Small-Employer Health Care Credit in NYC

admin — Wed, 28 Jul 2010 12:00:49 +0000

Dear Client:
Our Manhattan CPAs want yo make sure that you are aware of the following development in NYC small business taxes: The IRS has released guidance on computing the health insurance tax credit for eligible New York small businesses that make nonelective contributions toward their employee’s health insurance premiums.

The Patient Protection and Affordable Care Act added a provision that allows eligible New York City small businesses a tax credit for nonelective contributions that pay for at least one-half of the cost of health insurance premiums for the coverage of participating employees. The amount of the NYC small business tax credit is equal to 35 percent of the lesser of:
1. The total amount of the nonelective contributions the employer makes on behalf of its employees during the tax year under a contribution arrangement for the payment of premiums for qualified health insurance coverage of its employees, or
2. The total amount of nonelective contributions that would have been made during the tax year if each employee taken into account in item (1) had enrolled in a qualified health plan that had a premium equal to the amount that the Secretary of Health and Human Services determines is the average premium for the small group market in the state in which the employer is offering health insurance coverage (or the area within the state that is specified by the Secretary of Health and Human Services).

An employer determines its status as an eligible New York small business each tax year. An employer is an eligible small employer if the following conditions are met:
•   it has 25 or fewer full-time equivalent (FTE) employees;
•   the average annual wages of these employees are not greater than twice the applicable dollar amount for the tax year ($25,000 in tax years beginning in 2010 through 2013); and
•   the employer has a qualified health care arrangement in effect.
Certain employees are excluded from the determination of FTEs. Excluded employees are sole proprietors, partners in a partnership, shareholders owning more than 2 percent of an S corporation, and any owners of more than 5 percent of other businesses. Family members of these owners and partners are also not taken into account as employees.

The IRS guidance clarifies, among other things, how employers calculate the credit, the types of coverage that are eligible for the credit, and the interaction of the federal tax credit with New York small business tax credits. In addition, the IRS provides the average premium for the small group market in each state for the 2010 tax year for purposes of computing the amount of the credit.

The health insurance tax credit for NYC small businesses is one of many provisions of the Patient Protection and Affordable Care Act that encourages the shared responsibility for health insurance coverage of all Americans. If you have any questions regarding your eligibility or the calculation of the credit, please call our Manhattan small business CPAs at your earliest convenience.
Sincerely yours,

Jonathan Medows, CPA

MEDOWS CPA, PLLC

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

Affordable Care Act Requirements for NYC Tanning Services

admin — Wed, 30 Jun 2010 18:48:16 +0000

Breaking news from our Manhattan income tax CPAs: Starting July 1, 2010, many mall businesses offering tanning services in New York must collect a 10 percent excise tax on the tanning services they provide. This excise tax requirement is part of the Affordable Care Act that was enacted in March 2010.

Here are nine tips on the tanning excise tax that providers must collect.
1.       Businesses providing ultraviolet tanning services must collect the 10 percent excise tax at the time the customer pays for the tanning services.
2.       If the customer fails to pay the excise tax, the tanning service provider is liable for the tax.
3.       The tax does not apply to phototherapy services performed by a licensed medical professional on his or her premises.
4.       The tax does not apply to spray-on tanning services.
5.       If a payment covers charges for tanning services along with other goods and services, the other goods and services may be excluded from the tax if they are separately stated and the charges do not exceed the fair market value for those other goods and services.
6.       If the customer purchases bundled services and the charges are not separately stated, the tax applies to the portion of the payment that can be reasonably attributed to the indoor tanning services.
7.       The tax does not have to be paid on membership fees for certain qualified physical fitness facilities that offer indoor tanning services as an incidental service to members without a separately identifiable fee.
8.       Tanning service providers must report and pay the excise tax on a quarterly basis.
9.       To pay the tax, businesses must file IRS Form 720, Quarterly Federal Excise Tax Return using an Employer Identification Number assigned by the IRS. Businesses that don’t already have one can apply for an EIN online at IRS.gov.

If you have any questions about this issue, or how it may affect your small business tax preparation in New York City, call one of our Manhattan income tax CPAs today.

Jonathan Medows, CPA

MEDOWS CPA, PLLC

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

Flexible Spending Arrangements in New York

admin — Wed, 30 Jun 2010 12:00:33 +0000

Many medications are increasingly becoming available over-the-counter without a prescription. In recent years, individuals could use funds in their health Flexible Spending Arrangements (health FSAs) to pay for over-the-counter drugs, as well as prescription meds and other healthcare costs. However, the new health care reform package makes some important changes to health FSAs, including prohibiting health FSA dollars to be used for over-the-counter medications. Keep reading to discover how these changes will affect your small business and your NYC income taxes.

Health care costs. In New York City, health FSAs allow employees to be reimbursed for health care, dependent care or other expenses that are excludable from gross income if paid by an employer. Medical care includes amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease. Medicines and drugs are expenditures for medical care. In 2010, health FSAs may also reimburse employees for out-of-pocket expenses for over-the-counter drugs as well.

The health care reform package (the Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Reconciliation Act of 2010) modifies the definition of medical expenses for health FSAs to conform them to the definition used for the medical expense itemized deduction. This means that over-the-counter drugs are excluded unless prescribed by a health care professional. The new law makes an exception for insulin. This new treatment is effective for tax years beginning after December 31, 2010.

You should receive information from your employer or heath FSA administrator about this important change. If you are a Manhattan Small Business owner and are curious as to how this will effect your income taxes in New York, please contact our office.

“Use it or lose it rule.” FSAs have some important limitations. Amounts withdrawn from an FSA must be used to reimburse medical care expenses. Any excess cash in the account at the end of the year will be forfeited. This is known as the “use it or lose it” rule. However, the IRS has given small business owners and other employers permission to modify FSAs to extend the deadline for up to 2 1/2 months after the end of the plan year.

FSA funding. The FSA may be funded by employer contributions or by a salary reduction agreement with each employee as that employee so elects at the start of each year. The employer must take the initiative to establish the FSAs; the employee cannot start one on his or her own. The employer as the plan sponsor also shoulders the incidental administrative costs of running the FSAs.

The health care reform package places an important new limit on contributions to health FSAs. After 2012, contributions will be capped at $2,500 per year. The $2,500 amount is indexed for inflation after 2013.
Dependent care FSAs. Independent of a health FSA, small business owners may set up dependent care FSAs to cover costs of day care, summer day camp, and for the care of a physically or mentally incapacitated dependent of any age. If the employer offers a dependent care program or an FSA, the taxpayer may choose to (1) receive up to $5,000 in tax-free dependent care from the employer plan or convert a portion of his or her salary (up to $5,000) to a tax-free spending account, (2) take the child care credit at the end of the year or (3) use a combination of the two alternatives.

If you have any questions about health FSAs or dependent care FSAs as applied to your NYC small business income taxes, please contact our office.

Jonathan Medows, CPA

MEDOWS CPA, PLLC

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

Understanding Cancellation of Debt Income in New York

admin — Sun, 27 Jun 2010 12:00:48 +0000

This letter is intended to provide you with some information related to cancellation of debt (COD) income in New York. If you have had a lender discharge part or all of a debt that you were liable for, you may owe NYC income tax on the amount that was discharged. This is because certain debts that are cancelled or forgiven by a lender result in taxable income to you, even though you have not technically received any money in hand from the debt forgiveness.

Generally, debt that is discharged or canceled by a lender must be included in your New York City taxable income. Debt forgiveness income, or COD income, is the product of the amount of debt that a lender discharges or cancels. Unless a specific exception applies, a lender’s cancellation of debt will generally result in income to the borrower. If you have had a lender discharge all or part of a debt that you owe, and you would like to know what your tax obligations are regarding the cancelled amount, please contact our office.

In general, if the amount forgiven or canceled is $600 or more, the lender must issue to you and to the IRS a Form 1099-C, Cancellation of Debt, showing the amount of debt canceled. Even though the creditor has issued Form 1099-C, you may be able to claim an exclusion from income for the canceled debt.

Exclusions from income. COD income is not always taxable in New York. The most common situations in which cancelled debt does not result in taxable income include the following:
1. The debt has been discharged through a bankruptcy proceeding under Title 11;

2. Insolvency (your total debts exceed your total assets);

3.The debt is due to a qualified farm expense or farm property (“qualified farm indebtedness”); and

4.The debt is due to certain real property used in a trade or business (“qualified real property business indebtedness”).

Other exclusions may apply to student loans, disaster victims, gifts, general welfare payments, and deductible payments.

Reduction of attributes
When canceled debt is excluded from income, the debtor may be required to reduce NYC tax attributes, such as the basis of property. The reduction of attributes must be reported on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and included with your federal income tax return. If you do not reduce attributes, the IRS may take the position that you are taxable on the COD income.

A note on non-recourse loans. A non-recourse loan is a loan in which your lender’s only remedy in case of default is to repossess the property subject to the loan. That is, property that is either being financed or used as collateral for the loan. In these cases, your lender cannot pursue you personally in case of default. Although forgiveness of a non-recourse loan resulting from a foreclosure does not result in COD income, it may result in other Manhattan tax ramifications. Please contact our office if this applies to your situation, or if you don’t know whether your loan is non-recourse.

Mortgage debt forgiveness. For a limited period of time, certain mortgage debt that is discharged by the lender is excludable from COD income and therefore does not result in taxable income to homeowners in New York City. This is generally referred to as “qualified principal residence indebtedness.” The cancellation of qualifying mortgage debt is excludable from income if it is incurred with respect to the New York taxpayer’s principal residence for “acquisition” debt forgiven on or after January 1, 2007 and before January 1, 2013. Acquisition debt is indebtedness secured by the residence and incurred in the acquisition, construction or substantial improvement of the residence.

Certain debt used to refinance the debt is also eligible. Debt forgiven on a second home or rental property does not qualify.
Credit card and car loan debt. Noticeably absent from the specific exceptions to COD income are two of the biggest consumer debt items: credit cards and car loans. Credit card debt or an unpaid debt on a car loan that is forgiven by the lender is includable in gross income, unless the debtor is bankrupt or insolvent. The lender will report the amount of forgiven debt on Form 1099-C.

If you had debt discharged from income in 2009 that does, or does not, qualify for an exception, you must include the amount of cancelled debt in your gross income on your New York City tax return. If you have questions about COD income, the exclusions from income, or your reporting responsibilities, please contact our office.
Sincerely yours,

Jonathan Medows, CPA,
MEDOWS CPA, PLLC

Jonathan Medows, CPA

MEDOWS CPA, PLLC

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

Planning for 2013:Get Ready for the 3.8% Medicare Tax on NYC Investment Income

admin — Sat, 26 Jun 2010 12:00:17 +0000

Attention New York City taxpayers: The recently passed Reconciliation Act of 2010 imposes a new 3.8% Medicare contribution tax on the investment income of higher-income individuals. Although the tax does not take effect until 2013, it is not too soon to examine methods to lessen the impact of the tax for those of you who are preparing your small business taxes in Manhattan.

Net investment income. Net investment income, for purposes of the new 3.8 percent Medicare tax as applied to New York, includes interest, dividends, annuities, royalties and rents and other gross income attributable to a passive activity. Gains from the sale of property that is not used in an active business and income from the investment of working capital are treated as investment income as well. However, the tax does not apply to nontaxable income, such as tax-exempt interest or veterans’ benefits. Further, an individual’s capital gains income will be subject to the tax. This includes gain from the sale of a principal residence, unless the gain is excluded from income under Code Sec. 121, and gains from the sale of a vacation home. However, contemplated sales made before 2013 would avoid the tax.

The tax applies to estates and trusts, on the lesser of undistributed net income or the excess of the trust/estate adjusted gross income (AGI) over the threshold amount ($11,200) for the highest tax bracket for trusts and estates, and to investment income they distribute.

Deductions. Net investment income for purposes of the new 3.8 percent tax is gross income or net gain, reduced by deductions that are “properly allocable” to the income or gain. This is a key term that the Treasury Department expects to address in guidance, and which we will update you on developments. For passively-managed real property, allocable expenses will still include depreciation and operating expenses. Indirect expenses such as Manhattan tax preparation fees may also qualify.

For capital gain property, this formula puts a premium on keeping tabs on amounts that increase your New York property’s basis. It also puts the focus on investment expenses that may reduce net gains: interest on loans to purchase investments, investment counsel and advice, and fees to collect income. Other costs, such as brokers’ fees, may increase basis or reduce the amount realized from an investment. As such, you may want to consider avoiding installment sales with net capital gains (and interest) running past 2012.

Thresholds and impact. The tax applies to the lesser of net investment income or modified AGI above $200,000 for individuals and heads of household, $250,000 for joint filers and surviving spouses, and $125,000 for married filing separately. MAGI is AGI increased by foreign earned income otherwise excluded under Code Sec. 911; MAGI is the same as AGI for someone who does not work overseas.
Example. Jim, a single individual, has modified AGI of $220,000 and net investment income of $40,000. The tax applies to the lesser of (i) net investment income ($40,000) or (ii) modified AGI ($220,000) over the threshold amount for an individual ($200,000), or $20,000. The tax is 3.8 percent of $20,000, or $760. In this case, the tax is not applied to the entire $40,000 of investment income.
The tax can have a substantial impact if you have income above the specified thresholds. Also, don’t forget that, in addition to the tax on investment income, you may also face other tax increases proposed by the Obama administration that could take effect in 2011. The top two marginal NYC income tax rates on individuals would rise from 33 and 35 percent to 36 and 39.6 percent, respectively. The maximum tax rate on long-term capital gains would increase from 15 percent to 20 percent. Moreover, dividends, which are currently capped at the 15 percent long-term capital gain rate, would be taxed as ordinary income. Thus, the cumulative rate on capital gains would increase to 23.8 percent in 2013, and the rate on dividends would jump to as much as 43.4 percent. Moreover, the thresholds are not indexed for inflation, so a greater number of Manhattan taxpayers may be affected as time elapses.

Exceptions. Certain items and taxpayers are not subject to the 3.8 percent tax. A significant exception applies to distributions from qualified plans, 401(k) plans, tax-sheltered annuities, individual retirement accounts (IRAs), and eligible 457 plans. There is no exception for distributions from nonqualified deferred compensation plans subject to Code Sec. 409A.

The exception for distributions from retirement plans suggests that potentially taxed investors may want to shift wages and investments to retirement plans such as 401(k) plans, 403(b) annuities, and IRAs, or to 409A deferred compensation plans. Increasing contributions will reduce income and may help you stay below the applicable thresholds. Small business owners preparing their taxes in Manhattan may want to set up retirement plans, especially 401(k) plans, if they have not yet established a plan, and should consider increasing their contributions to existing plans.

Another exception covers income ordinarily derived from a trade or business that is not a passive activity under Code Sec. 469, such as a sole proprietorship. Investment income from an active trade or business is also excluded. However, SECA (Self-Employment Contributions Act) tax will still apply to proprietors and partners. Income from trading in financial instruments and commodities is also subject to the tax. The tax does not apply to income from the sale of an interest in a partnership or S corporation, to the extent that gain of the entity’s property would be from an active trade or business. The tax also does not apply to business entities (such as corporations and limited liability companies), nonresident aliens (NRAs), charitable trusts that are tax-exempt, and charitable remainder trusts that are nontaxable under Code Sec. 664.

Please contact our office if you would like to discuss the tax consequences to your investments of the new 3.8 percent Medicare tax on investment income. If you are a S-corp, C-corp, LLC or other form of small business in New York, we are the CPA firm for you. We have years experience dealing with small business tax preparation in NYC, and we will be able to assist you in all of your NYC tax needs.

Jonathan Medows, CPA

MEDOWS CPA, PLLC

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

NYC S-Corp: Audit Warning

admin — Fri, 25 Jun 2010 12:00:55 +0000

As a Manhattan CPA firm who specializes in small business tax preparation, we have noticed that S corporations have enjoyed exponential growth over the years in New York, becoming “king of the entities” among those forms of doing business nationwide as well. Except for the unincorporated sole proprietorships, the S corporation is the most popular form of small business in New York State, as well as the whole country. In fact, over the past 15 years, the number of S corporations has quadrupled. S corporations are estimated to make up roughly 13 percent of all businesses. The growth of S corporations in New York State has not gone unnoticed by the IRS.
According to the Government Accountability Office (GAO), the most significant tax reasons for businesses to choose S corporation status in New York include its single level of taxation, ability to pass through business losses to shareholders, and the imposition of employment taxes on wages, rather then net business income. Combine the rising popularity of the S corporation with intense pressure put upon the IRS by Congressional leaders to close the “tax gap” (the difference between what is owed and what is collected) and the perfect storm for more IRS audits has developed. A recent report on the tax gap, which hovers at around $300 billion annually, blames up to 80 percent of it on small businesses. IRS intelligence also bears out that result, with a particularly large group of abusive tax techniques concentrated among S corporations.
The IRS received almost 4.4 million S corporation returns for 2008, the year in which the latest data is available. The IRS has begun to place more emphasis on the growing area of flow-through entities, “a source of potential noncompliance.” As such, the IRS is currently working on updating its analysis of S corporation collection and compliance data.
Since New York employment taxes are imposed on all net income of the owners of partnerships and proprietorships, this difference has provided a significant incentive for Manhattan S corporations to treat wages paid to owners as distributions and has been determined to be a serious area of noncompliance.
The IRS is also looking closely at NYC S corporation compensation practices. In particular, auditors’ eyebrows will be raised if salaries paid by an S corporation to its principal owner or owners look suspiciously low. One scenario involves a technique in which the S corporation owner/employee draws a low salary to avoid employment taxes that ordinarily would be due on additional wages but would escape tax if passed through as dividends. Not only are IRS examiners disallowing this technique but they reportedly are also assessing 20 percent accuracy-related penalties. A review of W-2 income and total distributions received by the S corporation owner-employee during the year may be in order for many businesses. The IRS has also issued a fact sheet on S corporation compensation.
The ability of S corporations to pass through losses provides a significant advantage over C corporations and is one of the main reasons for business owners to elect S corporation status. However, a significant area of noncompliance by S corporations that has drawn IRS attention involves incorrect and excessive determinations of basis by S corporations.
If you would like any further information on the recent IRS audit initiatives against S corporations in New York City, or if you would like us to do a thorough review of your compensation practices and other “audit triggers,” please call our office. Our firm of experienced Manhattan S corp CPAs will review your situation and advise you in the best ways to avoid any penalties regarding your New York S corp income taxes.

Jonathan Medows, CPA

MEDOWS CPA, PLLC

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

Living Trusts in NYC- An Introduction

admin — Wed, 23 Jun 2010 12:00:28 +0000

“Revocable living trusts” have become popular estate planning tools for many people in NYC. Whether a living trust is right for you, however, depends on a number of factors. A living trust in New York may benefit you greatly, or you may be worse off with one.
A living trust is a trust that you set up during your lifetime, to which you transfer most or all of your assets. You get the income from the trust, and also have the right to withdraw principal. You can revoke or cancel the trust at any time during your life. At death the trust becomes irrevocable and its income and assets are disposed of under terms specified by you in the trust papers.
Why would you do this? The main advantage of the living trust is that its assets are distributed without going through the court probate process. That avoids a filing fee in the probate court. Also, trustee fees generally are lower than nonfamily executors’ or personal representatives’ fees would be. However, even if probate is avoided there will be the expense of preparing an New York estate tax return, valuing and transferring assets, and making a formal accounting and settlement. Also, to avoid probate, all probate assets must be included in the living trust. If some are left out, a probate proceeding still would be necessary. As a result, those in New York with living trusts usually also have a will to direct any extra property into the trust.
Some of the other benefits and pitfalls to consider are:
Quicker distributions: Probating a will and gathering assets into the estate for distribution can take quite a bit of time. With a living trust, by contrast, all assets already are gathered together, so the trustee can make immediate distributions and continue paying bills as usual.
Protecting minors: Living trusts can help avoid the need to appoint a guardian to represent children’s interests, which can cause delay and add to administration costs.

Privacy protection: Since probate records are public, the size of your estate, and the names of beneficiaries and the amounts each received, can come into anyone’s possession. The size and terms of a living trust, by contrast, are not necessarily public matters.

Multiple residences: Those with real estate in more than one state can avoid the problems and expense of multiple probate proceedings by putting the out-of-state real estate in a living trust.

New York Income taxes: If you create a living trust, you will be taxed on its income in much the same way as if you continued to own the property outright.

NYC Estate taxes: It’s a fairly common misconception that living trusts save estate taxes in New York, but that’s not necessarily the case. The trust assets will be subject to New York estate tax just as if you continued to own them outright. Therefore, basic estate planning techniques, such as dividing a married couple’s assets to ensure that they receive the benefit of two unified credit exemption equivalent amounts, remain important in the context of living trusts as well transfers at death by will.

As we said, living trusts make a lot of sense for some people and none at all for others. You have to consider all of the pluses and minuses as they relate to your particular situation to make an informed choice about a living trust. We would be happy to assist you in making the decision that’s right for you, and to help you understand how having a trust may effect your tax preparation in New York City. Please call our manhattan office today if we can be of assistance.

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, 18 Jun 2010 12:00:24 +0000

Good news for NYC small business owners: To help jumpstart 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 New York payroll tax forgiveness and an employer tax credit of up to $1,000 for qualified new hires. 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. Keep reading for a breakdown of how this act will affect your Manhattan small business income taxes.

Payroll tax forgiveness. The HIRE Act provides qualified small business owners in NYC 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, which these individuals will use on income tax returns in New York City.
Let’s look at an example of payroll tax forgiveness as applied to a Manhattan based small business:
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 business owners 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 State 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, an 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, small business owners that hire new workers who qualify for payroll tax forgiveness may also be eligible for a tax credit for each qualified employee on their New York income tax return. 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 as it applies to you New York City small business income taxes, please contact our office for more details.

Expensing. Under Code Sec. 179, 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 NYC 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 office if you have any questions about the foreign account compliance provisions in the HIRE Act, and how they apply to your Manhattan income taxes.
Worldwide allocation of interest. Qualified taxpayers 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 Manhattan corporation is required to make quarterly estimated payments of New York 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 NYC 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 as it applies to New York income taxes, please contact our office.
Sincerely yours,

Jonathan Medows, CPA
MEDOWS CPA, PLLC

Jonathan Medows, CPA

MEDOWS CPA, PLLC