In recognition of National Small Business Week, the Internal Revenue Service encourages small businesses to take advantage of tax-saving opportunities included in recently enacted federal legislation.
A variety of business tax deductions and credits were created, extended and expanded by the American Recovery and Reinvestment Act of 2009 (ARRA), this year’s Hiring Incentives to Restore Employment (HIRE) Act and the Affordable Care Act. Because some of these changes are only available this year, eligible businesses only have a few months to take action and save on their taxes. Here is a rundown of some of the key provisions.
New Health Care Tax Credit Helps Small Employers
The small business health care tax credit, created under the Affordable Care Act, is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have.
The credit takes effect this year and is generally available to small employers that pay at least half the cost of single coverage for their employees in 2010. The credit is specifically targeted to help small employers that primarily employ low- and moderate-income workers.
For tax years 2010 to 2013, the maximum credit is 35 percent of premiums paid by eligible small business employers. The maximum credit goes to smaller employers — those with 10 or fewer full-time equivalent (FTE) employees — paying annual average wages of $25,000 or less. The credit is completely phased out for employers with more than 25 FTEs or with average wages of more than $50,000.
Because the eligibility rules are based in part on the number of FTEs, not the number of employees, businesses that use part-time help may qualify even if they employ more than 25 individuals. More information about the credit, including a step-by-step guide and answers to frequently asked questions, is available on the IRS website.
Two New Benefits for Employers that Hire and Retain Recently Unemployed
Employers who hire unemployed workers this year (after Feb. 3, 2010, and before Jan. 1, 2011) may qualify for a 6.2-percent payroll tax incentive, in effect exempting them from the employer’s share of Social Security tax on wages paid to these workers after March 18. In addition, for each qualified employee retained for at least a year whose wages did not significantly decrease in the second half of the year, businesses may claim a new hire retention credit of up to $1,000 per worker on their income tax return.
These tax benefits are especially helpful to employers who are adding positions to their payrolls. New hires filling existing positions also qualify but only if the workers they are replacing left voluntarily or for cause. Family members and other relatives generally do not qualify.
Employers must get a signed statement from each eligible new hire, certifying under penalties of perjury, that he or she was not employed for more than 40 hours during the 60 days before beginning employment with that employer. IRS Form W-11 can be used to meet this requirement. Further details, including answers to frequently asked questions, are posted on IRS.gov.
Work Opportunity Tax Credit Aids Employers That Hire Certain Workers
The work opportunity tax credit (WOTC) offers tax savings to businesses that hire employees belonging to various targeted groups. These groups include people ages 18 to 39 living in designated communities in 43 states and the District of Columbia, recipients of various types of public assistance, certain veterans, ex-felons and certain youth workers. The instructions for Form 8850 detail the requirements for each of these groups.
Certification by the state workforce agency is generally required. Normally, a business must file Form 8850 with the state workforce agency within 28 days after the eligible worker begins work.
An eligible employer can claim both the WOTC and the new hire retention credit for the same employee. However, an employer may not claim both the payroll tax exemption and the WOTC for the same employee. Therefore, any employer that chooses to apply the exemption to wages paid to a qualified employee may not receive the WOTC on any wages paid to that employee during the one-year period beginning on the employee’s hiring date.
Exclusion of Gain on the Sale of Certain Small Business Stock
An extra incentive is now available to individuals who invest in small businesses. Investors in qualified small business stock can exclude 75 percent of the gain upon sale of the stock. This increased exclusion applies only if the qualified small business stock is acquired after Feb. 17, 2009, and before Jan. 1, 2011, and held for more than five years. For previously-acquired stock, the exclusion rate remains at 50 percent in most cases.
COBRA Credit
Employers that provide the 65 percent COBRA premium subsidy to eligible former employees can claim credit for this subsidy on their quarterly or annual payroll tax returns. To help avoid imposing an unnecessary cash-flow burden, affected employers can reduce their payroll tax deposits by the amount of the credit. For details, see the instructions for Form 941.
Small business owners can find a variety of helpful on-line resources in the Small Business and Self-Employed Tax Center on IRS.gov.
Friday, May 28, 2010
Preparer Registration Update
David Williams, IRS Director of Electronic Tax Administration and Refundable Credits, provided some additional information regarding the preparer registration and testing requirements during a webinar he presented last week. Williams noted that the IRS still plans to roll out an online system where all preparers are able to register and obtain a PTIN this September. He also noted that the fees required would be somewhere between $75 and $300 for the three-year cycle, with an offsetting or reduced fee for enrolled agents. Enrolled agents are already subject to a $125 application and renewal fee.
When the online registration is initially launched, the IRS will not have the capability to automatically verify tax compliance and felony convictions. Instead, applicants will be asked to indicate under penalty of perjury whether they are current in their tax liability or if in the last ten years they have been convicted of a felony. Williams stated that an automatic compliance check may be implemented by mid-2011.
Williams also provided some detail regarding the competency exams, sharing that both exams will be open book and provided online. The identities and fingerprints of examinees would be verified by an on-site proctor similar to the process for taking the enrolled agents exam. One exam will cover Form 1040 wage and nonbusiness income and the earned income tax credit. The other exam will cover Form 1040 wage and small business income. Williams expects the exams to become available in May or June 2011. Preparers who obtained a PTIN prior to the availability of the exams will have three years to pass one of the two exams. Once the exam is available, preparers must pass an exam prior to obtaining a PTIN. Once preparers become registered, they will be required to complete 15 hours of continuing education each year, which must include at least three hours of federal tax law updates and two hours of ethics.
When the online registration is initially launched, the IRS will not have the capability to automatically verify tax compliance and felony convictions. Instead, applicants will be asked to indicate under penalty of perjury whether they are current in their tax liability or if in the last ten years they have been convicted of a felony. Williams stated that an automatic compliance check may be implemented by mid-2011.
Williams also provided some detail regarding the competency exams, sharing that both exams will be open book and provided online. The identities and fingerprints of examinees would be verified by an on-site proctor similar to the process for taking the enrolled agents exam. One exam will cover Form 1040 wage and nonbusiness income and the earned income tax credit. The other exam will cover Form 1040 wage and small business income. Williams expects the exams to become available in May or June 2011. Preparers who obtained a PTIN prior to the availability of the exams will have three years to pass one of the two exams. Once the exam is available, preparers must pass an exam prior to obtaining a PTIN. Once preparers become registered, they will be required to complete 15 hours of continuing education each year, which must include at least three hours of federal tax law updates and two hours of ethics.
Wednesday, May 19, 2010
A One-Two Accounting Punch?
Will American companies have to go through a major accounting-standards overhaul twice? Some finance executives think so. They say the project to converge American and international standards is at odds with the push to introduce a host of new U.S. accounting rules over the next year, and warn that chaos could result.
That alarming prospect was raised last month during a panel discussion at a conference held by Pace University's Lubin School of Business. The problem will become more apparent in mid-2011, when American companies will be digesting at least 10 major new generally accepted accounting principles issued as joint projects of the Financial Accounting Standards Board and the International Accounting Standards Board. The areas covered include fair value measurement, accounting for financial instruments, leases, and revenue recognition (see list below).
Around the same time, the Securities and Exchange Commission is expected to announce whether public companies will have to abandon U.S. GAAP and adopt international financial reporting standards. If the answer is yes, it's likely that the regulator will require American companies to make the switch in 2016, just a few years after adopting the changes to U.S. GAAP.
Such a one-two punch would be costly and time-consuming, noted panelist Aaron Anderson, director of IFRS policy and implementation at IBM. Anderson hoped the SEC would allow companies to make the switch early and avoid the GAAP changes. The computer giant already reports results using IFRS at some of its subsidiary companies, Anderson said.
John McGinnis, chief accountant at HSBC North America, said that while he understood the need for "due process," he also believed that "early adoption [of IFRS] would be very helpful." Several HSBC subsidiaries already use IFRS, he said.
Regardless of the call from companies and foreign regulators to allow early adoption of IFRS, the SEC is not about to rush its decision. SEC chief accountant James Kroeker, who also spoke at the conference, said it was "too early" to comment on the progress of the commission's decision whether or not to abandon U.S. GAAP, although the SEC has promised to provide periodic updates starting in October.
Other groups publicly oppose the rapid pace of rulemaking and what a Financial Executives International committee characterizes as the "quality versus speed trade-off." In a letter to FASB, members of FEI's Committee on Private Company Standards said they were worried about private-company executives becoming "overwhelmed" by poring over exposure drafts while doing their day jobs.
Aware of the burden that both public and private companies face, FASB is considering "staggering" the rule implementation dates so the changes are rolled out more slowly, noted FASB technical director Russ Golden while speaking at an April industry meeting sponsored by the Zicklin School of Business at Baruch College.
"No one standard is an issue in and of itself," says Kelley Wall, senior consultant at accounting and financial advisory firm RoseRyan. "But the timing of all of them being issued in such a short time frame would be a significant strain on companies." Adds Jay Hanson, McGladrey & Pullen national director of accounting, "For companies that thought that [Sarbanes-Oxley] implementation was hard, implementing the new FASB rules will be even worse."
But Wall isn't too concerned about switching to IFRS after FASB issues its collection of new rules. She points out that all 10 rules currently in the exposure-draft stage are part of the IASB-FASB joint convergence project, meaning that in most cases, the IASB would be issuing a standard similar to the new FASB rules.
In fact, she believes the flood of new FASB rules may be in response to the SEC's notion that convergence should be complete before it decides whether to switch the country to IFRS. "Although implementing a host of new accounting standards in such a short time frame would be painful, it would make the eventual adoption of IFRS in the U.S. easier," says Wall.
That alarming prospect was raised last month during a panel discussion at a conference held by Pace University's Lubin School of Business. The problem will become more apparent in mid-2011, when American companies will be digesting at least 10 major new generally accepted accounting principles issued as joint projects of the Financial Accounting Standards Board and the International Accounting Standards Board. The areas covered include fair value measurement, accounting for financial instruments, leases, and revenue recognition (see list below).
Around the same time, the Securities and Exchange Commission is expected to announce whether public companies will have to abandon U.S. GAAP and adopt international financial reporting standards. If the answer is yes, it's likely that the regulator will require American companies to make the switch in 2016, just a few years after adopting the changes to U.S. GAAP.
Such a one-two punch would be costly and time-consuming, noted panelist Aaron Anderson, director of IFRS policy and implementation at IBM. Anderson hoped the SEC would allow companies to make the switch early and avoid the GAAP changes. The computer giant already reports results using IFRS at some of its subsidiary companies, Anderson said.
John McGinnis, chief accountant at HSBC North America, said that while he understood the need for "due process," he also believed that "early adoption [of IFRS] would be very helpful." Several HSBC subsidiaries already use IFRS, he said.
Regardless of the call from companies and foreign regulators to allow early adoption of IFRS, the SEC is not about to rush its decision. SEC chief accountant James Kroeker, who also spoke at the conference, said it was "too early" to comment on the progress of the commission's decision whether or not to abandon U.S. GAAP, although the SEC has promised to provide periodic updates starting in October.
Other groups publicly oppose the rapid pace of rulemaking and what a Financial Executives International committee characterizes as the "quality versus speed trade-off." In a letter to FASB, members of FEI's Committee on Private Company Standards said they were worried about private-company executives becoming "overwhelmed" by poring over exposure drafts while doing their day jobs.
Aware of the burden that both public and private companies face, FASB is considering "staggering" the rule implementation dates so the changes are rolled out more slowly, noted FASB technical director Russ Golden while speaking at an April industry meeting sponsored by the Zicklin School of Business at Baruch College.
"No one standard is an issue in and of itself," says Kelley Wall, senior consultant at accounting and financial advisory firm RoseRyan. "But the timing of all of them being issued in such a short time frame would be a significant strain on companies." Adds Jay Hanson, McGladrey & Pullen national director of accounting, "For companies that thought that [Sarbanes-Oxley] implementation was hard, implementing the new FASB rules will be even worse."
But Wall isn't too concerned about switching to IFRS after FASB issues its collection of new rules. She points out that all 10 rules currently in the exposure-draft stage are part of the IASB-FASB joint convergence project, meaning that in most cases, the IASB would be issuing a standard similar to the new FASB rules.
In fact, she believes the flood of new FASB rules may be in response to the SEC's notion that convergence should be complete before it decides whether to switch the country to IFRS. "Although implementing a host of new accounting standards in such a short time frame would be painful, it would make the eventual adoption of IFRS in the U.S. easier," says Wall.
States limit sweeping tax hikes — so far
While much of the nation may be focusing today (May 18) on key U.S. Senate primaries in Arkansas, Kentucky and Pennsylvania, a special statewide election in Arizona could gauge voters’ temperature on the question of whether or not to raise taxes.
Arizona voters will decide whether to endorse Republican Governor Jan Brewer's proposal to raise the state sales tax by a penny to 6.6 percent. The proposed tax hike would last for three years, raising $1 billion. If approved, it would mark a departure from what many state legislatures have been doing in 2010 to balance their books.
Few states are going for across-the-board hikes in sales taxes, one of their major sources of revenue. Instead, they are slapping higher sales taxes on particular items, from tanning beds in Indiana to wind energy in Wyoming.
The Kansas Legislature is the lone exception thus far. Kansas bumped up its rate by a penny, from 5.3 percent to 6.3 percent starting July 1.
Compare these moves to last year, when California, Massachusetts, Nevada and North Carolina all went after higher sales tax rates.
If Arizona voters endorse the governor’s tax plan, they would join Oregon voters, who in January approved a general tax increase, although Oregon’s targeted corporations and the wealthy.
At least 28 statehouses have completed their sessions for the year. Some of the most cash-strapped states, such as California, New Jersey, Ohio, Pennsylvania and Rhode Island, are among those whose legislatures are still in session and working on new budgets that begin July 1.
While the revenue picture appears to be brightening, states are facing a third straight year of cutting spending and raising taxes and fees. And it won’t be the last. At least two more lean years are in the offing because tax collections plunged more than 18 percent during the recession.
Here’s how states are responding, thus far, on the tax front:
Higher taxes on candy and soda passed in Colorado and Washington State. A similar measure is pending in Massachusetts.
Cigarettes are still a target, as New Mexico, Utah and Washington all raised the tax by $1 per pack, while Hawaii boosted its rate by 20 cents. Over the governor’s objections, South Carolina raised its tax by 50 cents, so the state no longer has the lowest-in-the-nation cigarette tax (Missouri now holds that distinction).
Sixteen states raised tobacco taxes last year.
The “Amazon” tax— essentially, enforcing the sales-tax law on Internet purchases — is still getting a look even though the legality of it is in question. Colorado acted this year. North Carolina and Rhode Island were among states that passed last year, following New York’s lead.
Discontinuation of tax breaks or exemptions is increasing. Colorado dropped a sales-tax exemption for “to-go containers” and other items ranging from printed materials used in direct-mail advertising to compounds used in agriculture. Iowa dropped $115 million worth of tax credits it didn’t think created jobs and suspended for three years its incentives for boosting film productions in the state. Hawaii suspended the claiming of technology investment tax credits and repealed deductions for political contributions.
Arizona voters will decide whether to endorse Republican Governor Jan Brewer's proposal to raise the state sales tax by a penny to 6.6 percent. The proposed tax hike would last for three years, raising $1 billion. If approved, it would mark a departure from what many state legislatures have been doing in 2010 to balance their books.
Few states are going for across-the-board hikes in sales taxes, one of their major sources of revenue. Instead, they are slapping higher sales taxes on particular items, from tanning beds in Indiana to wind energy in Wyoming.
The Kansas Legislature is the lone exception thus far. Kansas bumped up its rate by a penny, from 5.3 percent to 6.3 percent starting July 1.
Compare these moves to last year, when California, Massachusetts, Nevada and North Carolina all went after higher sales tax rates.
If Arizona voters endorse the governor’s tax plan, they would join Oregon voters, who in January approved a general tax increase, although Oregon’s targeted corporations and the wealthy.
At least 28 statehouses have completed their sessions for the year. Some of the most cash-strapped states, such as California, New Jersey, Ohio, Pennsylvania and Rhode Island, are among those whose legislatures are still in session and working on new budgets that begin July 1.
While the revenue picture appears to be brightening, states are facing a third straight year of cutting spending and raising taxes and fees. And it won’t be the last. At least two more lean years are in the offing because tax collections plunged more than 18 percent during the recession.
Here’s how states are responding, thus far, on the tax front:
Higher taxes on candy and soda passed in Colorado and Washington State. A similar measure is pending in Massachusetts.
Cigarettes are still a target, as New Mexico, Utah and Washington all raised the tax by $1 per pack, while Hawaii boosted its rate by 20 cents. Over the governor’s objections, South Carolina raised its tax by 50 cents, so the state no longer has the lowest-in-the-nation cigarette tax (Missouri now holds that distinction).
Sixteen states raised tobacco taxes last year.
The “Amazon” tax— essentially, enforcing the sales-tax law on Internet purchases — is still getting a look even though the legality of it is in question. Colorado acted this year. North Carolina and Rhode Island were among states that passed last year, following New York’s lead.
Discontinuation of tax breaks or exemptions is increasing. Colorado dropped a sales-tax exemption for “to-go containers” and other items ranging from printed materials used in direct-mail advertising to compounds used in agriculture. Iowa dropped $115 million worth of tax credits it didn’t think created jobs and suspended for three years its incentives for boosting film productions in the state. Hawaii suspended the claiming of technology investment tax credits and repealed deductions for political contributions.
IRS Issues Guidance on Eligibility for Small Firm Health Care Credit
By Lauren Gardner
Publication date: 05/18/2010
The Internal Revenue Service May 17 provided comprehensive guidance (Notice 2010-44) on a small-employer tax credit included in recently enacted health care reform legislation, clarifying that the federal credit will never be reduced because an employer is receiving a state health care subsidy.
Notice 2010-44 addresses four primary issues taxpayers raised to IRS and the Treasury Department about the small business health care tax credit—the effect of state subsidies on the federal credit, how add-on insurance is treated, how to calculate the hours worked by employees, and some transition issues small businesses may face, Treasury Assistant Secretary for Tax Policy Michael Mundaca said during a teleconference with reporters.
The tax code Section 45R tax credit, which is effective for taxable years beginning in 2010 through 2013, is designed to encourage small employers to offer health coverage for the first time or to maintain coverage they already provide, the service said in an accompanying news release (IR-2010-63). The tax credit was included in the Patient Protection and Affordable Care Act (Pub. L. No. 111-148) that President Obama signed into law March 23. Both taxable employers and employers that are tax-exempt organizations may be eligible for the Section 45R credit.
IRS provided the guidance just days after the National Federation of Independent Business, along with two individuals and seven additional states, joined as plaintiffs in a constitutional challenge to the Patient Protection and Affordable Care Act. This brings the total number of states involved in the lawsuit to 20.
Three Main Qualifications for Employers
In order for an employer to qualify for the credit, it must have fewer than 25 full-time-equivalent employees (FTEs) for the taxable year; the average annual wages of its employees for the year must be less than $50,000 per FTE; and it must maintain a “qualifying arrangement” under which the employer pays a uniform percentage of at least 50 percent of the premium cost of the health coverage for each employee covered under the employer-provided insurance, IRS said in the notice. The Section 45R credit covers up to 35 percent of the premiums that eligible small businesses pay on behalf of their employees and up to 25 percent of the employer's premium payments for a tax-exempt eligible small employer.
The credit will work in two stages, with the 35 percent credit being available through 2013 as the lead-in to the establishment to the state health insurance exchanges, though it will be available for two additional years after that, Mundaca said. At that point, small employers will be expected to transition employees to the exchanges, he said.
The notice makes clear that small businesses receiving state health care tax credits may still qualify for the full federal credit, IRS said in the news release. Mundaca said the government sought to address a number of questions on this issue, by clarifying in the notice how the two subsidies would interact.
The guidance also allows businesses to receive the credit for add-on dental and vision coverage as well as for regular health insurance as long as they meet the requirements of the notice, Mundaca said. The legislation provided Treasury with the flexibility to determine what constitutes health coverage, “and it was left to us to fill in many of the definitional issues around those general terms,” he said.
Flexibility in Calculating Hours Worked
The guidance provides three methods for employers to calculate the total number of hours of service that must be taken into account for an employee for the year:
* determine actual hours of service from records of hours worked and hours for which payment is made or due, including such payment for illness, vacation, holiday, and other applicable leave of absence time;
* use a “days-worked equivalency” through which the employee is credited with eight hours of service for each day for which he or she would be required to be credited with at least one hour of service; or
* use a “weeks-worked equivalency” through which the employee is credited with 40 hours of service for each week for which he or she would be required to be credited with at least one hour of service.
Partners in a business, certain owners, and their family members are not taken into account as employees for purposes of the tax credit, IRS said in the notice. Their wages are thus disregarded in determining FTEs and average annual wages, it said, and the premiums paid on their behalf are not counted in determining the amount of the credit.
Seasonal workers are also disregarded for these purposes unless they work for the employer on more than 120 days during the taxable year, IRS said, though premiums paid on their behalf may be counted in determining the amount of the credit.
Additionally, the notice provides guidance on how to determine the number of an employer's FTEs and how to determine the employer's average annual wages for the taxable year.
Information Reporting Guidance Expected
Mundaca also said May 17 that Treasury intends to issue guidance within the next few months with respect to the interaction of a new law requiring the reporting of credit card transactions with a provision in the health reform law that requires businesses to use Form 1099 to report to IRS all payments to corporations in excess of $600 for goods or services, effective in 2012. IRS and the secretary of the treasury have the authority to prevent duplicative reporting, he said.
Rep. Dan Lungren (R-Calif.) recently said he intends to introduce legislation that would repeal the information reporting requirement included in PPACA, calling the provision an unnecessary and expensive paperwork burden on U.S. small businesses.
Mundaca said IRS and Treasury are trying to provide the clearest guidance possible to get out in front of challenges they may face in administering the credit. “We look forward to continue to engage with the small business community” and answer questions as they arise, he said.
IRS and Treasury requested in the notice that taxpayers submit comments on issues that should be addressed in future guidance that the department plans to issue on additional issues under Section 45R, such as the application of the uniformity requirement and the 50 percent requirement for taxable years beginning after 2010.
The notice will be published in Internal Revenue Bulletin 2010-22 June 1.
The complete text of this article can be found in the BNA Daily Tax Report, May 18, 2010. For comprehensive coverage of taxation, pension, budget, and accounting issues, sign up for a free trial or subscribe to the BNA Daily Tax Report today.
© 2010, The Bureau of National Affairs, Inc.
Publication date: 05/18/2010
The Internal Revenue Service May 17 provided comprehensive guidance (Notice 2010-44) on a small-employer tax credit included in recently enacted health care reform legislation, clarifying that the federal credit will never be reduced because an employer is receiving a state health care subsidy.
Notice 2010-44 addresses four primary issues taxpayers raised to IRS and the Treasury Department about the small business health care tax credit—the effect of state subsidies on the federal credit, how add-on insurance is treated, how to calculate the hours worked by employees, and some transition issues small businesses may face, Treasury Assistant Secretary for Tax Policy Michael Mundaca said during a teleconference with reporters.
The tax code Section 45R tax credit, which is effective for taxable years beginning in 2010 through 2013, is designed to encourage small employers to offer health coverage for the first time or to maintain coverage they already provide, the service said in an accompanying news release (IR-2010-63). The tax credit was included in the Patient Protection and Affordable Care Act (Pub. L. No. 111-148) that President Obama signed into law March 23. Both taxable employers and employers that are tax-exempt organizations may be eligible for the Section 45R credit.
IRS provided the guidance just days after the National Federation of Independent Business, along with two individuals and seven additional states, joined as plaintiffs in a constitutional challenge to the Patient Protection and Affordable Care Act. This brings the total number of states involved in the lawsuit to 20.
Three Main Qualifications for Employers
In order for an employer to qualify for the credit, it must have fewer than 25 full-time-equivalent employees (FTEs) for the taxable year; the average annual wages of its employees for the year must be less than $50,000 per FTE; and it must maintain a “qualifying arrangement” under which the employer pays a uniform percentage of at least 50 percent of the premium cost of the health coverage for each employee covered under the employer-provided insurance, IRS said in the notice. The Section 45R credit covers up to 35 percent of the premiums that eligible small businesses pay on behalf of their employees and up to 25 percent of the employer's premium payments for a tax-exempt eligible small employer.
The credit will work in two stages, with the 35 percent credit being available through 2013 as the lead-in to the establishment to the state health insurance exchanges, though it will be available for two additional years after that, Mundaca said. At that point, small employers will be expected to transition employees to the exchanges, he said.
The notice makes clear that small businesses receiving state health care tax credits may still qualify for the full federal credit, IRS said in the news release. Mundaca said the government sought to address a number of questions on this issue, by clarifying in the notice how the two subsidies would interact.
The guidance also allows businesses to receive the credit for add-on dental and vision coverage as well as for regular health insurance as long as they meet the requirements of the notice, Mundaca said. The legislation provided Treasury with the flexibility to determine what constitutes health coverage, “and it was left to us to fill in many of the definitional issues around those general terms,” he said.
Flexibility in Calculating Hours Worked
The guidance provides three methods for employers to calculate the total number of hours of service that must be taken into account for an employee for the year:
* determine actual hours of service from records of hours worked and hours for which payment is made or due, including such payment for illness, vacation, holiday, and other applicable leave of absence time;
* use a “days-worked equivalency” through which the employee is credited with eight hours of service for each day for which he or she would be required to be credited with at least one hour of service; or
* use a “weeks-worked equivalency” through which the employee is credited with 40 hours of service for each week for which he or she would be required to be credited with at least one hour of service.
Partners in a business, certain owners, and their family members are not taken into account as employees for purposes of the tax credit, IRS said in the notice. Their wages are thus disregarded in determining FTEs and average annual wages, it said, and the premiums paid on their behalf are not counted in determining the amount of the credit.
Seasonal workers are also disregarded for these purposes unless they work for the employer on more than 120 days during the taxable year, IRS said, though premiums paid on their behalf may be counted in determining the amount of the credit.
Additionally, the notice provides guidance on how to determine the number of an employer's FTEs and how to determine the employer's average annual wages for the taxable year.
Information Reporting Guidance Expected
Mundaca also said May 17 that Treasury intends to issue guidance within the next few months with respect to the interaction of a new law requiring the reporting of credit card transactions with a provision in the health reform law that requires businesses to use Form 1099 to report to IRS all payments to corporations in excess of $600 for goods or services, effective in 2012. IRS and the secretary of the treasury have the authority to prevent duplicative reporting, he said.
Rep. Dan Lungren (R-Calif.) recently said he intends to introduce legislation that would repeal the information reporting requirement included in PPACA, calling the provision an unnecessary and expensive paperwork burden on U.S. small businesses.
Mundaca said IRS and Treasury are trying to provide the clearest guidance possible to get out in front of challenges they may face in administering the credit. “We look forward to continue to engage with the small business community” and answer questions as they arise, he said.
IRS and Treasury requested in the notice that taxpayers submit comments on issues that should be addressed in future guidance that the department plans to issue on additional issues under Section 45R, such as the application of the uniformity requirement and the 50 percent requirement for taxable years beginning after 2010.
The notice will be published in Internal Revenue Bulletin 2010-22 June 1.
The complete text of this article can be found in the BNA Daily Tax Report, May 18, 2010. For comprehensive coverage of taxation, pension, budget, and accounting issues, sign up for a free trial or subscribe to the BNA Daily Tax Report today.
© 2010, The Bureau of National Affairs, Inc.
IRS Posts Revised Form 941 and Instructions for Claiming New Hire Payroll Tax Exemption
On May 18, the IRS posted a new version of Form 941, Employer’s QUARTERLY Federal Tax Return, and its instructions for claiming the special payroll tax exemption that applies to new workers hired in 2010.
The Hiring Incentives to Restore Employment Act (HIRE Act) created a payroll tax exemption for employers who hire workers who have been unemployed for at least 60 days and who are not replacement hires. For qualifying new employees hired after Feb. 3, 2010, and before Jan. 1, 2011, an employer can claim an exemption equal to the employer’s share of Social Security taxes on wages paid in 2010 after March 19.
On the newly revised Form 941, employers will claim the exemption related to wages paid after March 31 on lines 6a through 6e (or on lines 12c through 12e for the exemption related to wages paid between March 19 and March 31). These lines ask for the number of qualified employees who were first paid exempt wages or tips in the quarter, the number of qualified employees who were paid exempt wages or tips in the quarter, and the amount of the wages and tips paid to qualified employees, which are multiplied by 0.062 (the amount of the employer’s share of Social Security tax). This amount is subtracted from the total Social Security and Medicare tax reported on line 5d.
The exemption for the employer’s share of Social Security taxes on wages paid to eligible employees between March 19 and March 31 is treated on the second quarter Form 941 as an April 1 tax deposit and does not adjust the amount of tax liability reported on lines 10 and 17.
The instructions say that an employer cannot claim the Social Security tax exemption and the work opportunity credit for the same employee. If an employer does not wish to claim the Social Security tax exemption for an eligible employee, the employer omits that employee and his or her wages from lines 6a through 6d (and lines 12c through 12e, if applicable).
To be a qualified employee for purposes of the payroll tax exemption, the employee must have signed Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, (or a similar statement) under penalties of perjury. The employee must not be a replacement hire, unless the worker being replaced separated from service voluntarily or for cause, and the employee cannot be related to the employer or to a 50% owner.
The Hiring Incentives to Restore Employment Act (HIRE Act) created a payroll tax exemption for employers who hire workers who have been unemployed for at least 60 days and who are not replacement hires. For qualifying new employees hired after Feb. 3, 2010, and before Jan. 1, 2011, an employer can claim an exemption equal to the employer’s share of Social Security taxes on wages paid in 2010 after March 19.
On the newly revised Form 941, employers will claim the exemption related to wages paid after March 31 on lines 6a through 6e (or on lines 12c through 12e for the exemption related to wages paid between March 19 and March 31). These lines ask for the number of qualified employees who were first paid exempt wages or tips in the quarter, the number of qualified employees who were paid exempt wages or tips in the quarter, and the amount of the wages and tips paid to qualified employees, which are multiplied by 0.062 (the amount of the employer’s share of Social Security tax). This amount is subtracted from the total Social Security and Medicare tax reported on line 5d.
The exemption for the employer’s share of Social Security taxes on wages paid to eligible employees between March 19 and March 31 is treated on the second quarter Form 941 as an April 1 tax deposit and does not adjust the amount of tax liability reported on lines 10 and 17.
The instructions say that an employer cannot claim the Social Security tax exemption and the work opportunity credit for the same employee. If an employer does not wish to claim the Social Security tax exemption for an eligible employee, the employer omits that employee and his or her wages from lines 6a through 6d (and lines 12c through 12e, if applicable).
To be a qualified employee for purposes of the payroll tax exemption, the employee must have signed Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, (or a similar statement) under penalties of perjury. The employee must not be a replacement hire, unless the worker being replaced separated from service voluntarily or for cause, and the employee cannot be related to the employer or to a 50% owner.
Thursday, May 13, 2010
Registered Preparer Update
At a recent American Bar Association Section of Taxation meeting in Washington D.C., IRS officials provided a bit more detail on the upcoming PTIN registration, testing, and tax compliance checks that will soon be required by all paid tax return preparers. Here is what we know to date:
• All paid preparers will be required to register and obtain a PTIN by January 1, 2011, or they cannot prepare returns for compensation.
• The online registration system is on track to begin September 1, 2010.
• All preparers who register by January 1, 2011, will have three years to pass the competency exam.
• The exams are scheduled to become available in May 2011.
• Once testing has begun, preparers will not be issued a PTIN until they have passed one of two exams.
• Once paid preparers register, they will be subject to the 15-hour per year continuing education requirement. The IRS plans to base the completion of the required continuing education on the preparer’s registration anniversary date as opposed to a calendar year for everyone.
The IRS has still not disclosed the amount of the user fees required to register or take the exam. They have, however, indicated that they are trying to figure out a way to net the cost with the enrolled agent renewal fee so EAs are not paying twice.
• All paid preparers will be required to register and obtain a PTIN by January 1, 2011, or they cannot prepare returns for compensation.
• The online registration system is on track to begin September 1, 2010.
• All preparers who register by January 1, 2011, will have three years to pass the competency exam.
• The exams are scheduled to become available in May 2011.
• Once testing has begun, preparers will not be issued a PTIN until they have passed one of two exams.
• Once paid preparers register, they will be subject to the 15-hour per year continuing education requirement. The IRS plans to base the completion of the required continuing education on the preparer’s registration anniversary date as opposed to a calendar year for everyone.
The IRS has still not disclosed the amount of the user fees required to register or take the exam. They have, however, indicated that they are trying to figure out a way to net the cost with the enrolled agent renewal fee so EAs are not paying twice.
E-File Mandate
The Worker, Homeownership, and Business Assistance Act of 2009, requires tax return preparers who prepare more than ten individual income tax returns in a calendar year to e-file. This was to be effective for returns filed after December 31, 2010.
NATP has it on good authority that the IRS plans to postpone this requirement for one year, but instead will require preparers who prepare more than 100 returns after December 31, 2010, to e-file.
NATP has it on good authority that the IRS plans to postpone this requirement for one year, but instead will require preparers who prepare more than 100 returns after December 31, 2010, to e-file.
Friday, May 7, 2010
Many Tax-Exempt Organizations Must File Form 990 by May 17 Deadline to Preserve Tax-Exempt Status with IRS
A crucial filing deadline of May 17 is looming for many tax-exempt organizations that are required by law to file their Form 990 with the Internal Revenue Service or risk having their federal tax-exempt status revoked.
The Pension Protection Act of 2006 mandates that all non-profit organizations, other than churches and church related organizations, must file an information form with the IRS. This requirement has been in effect since the beginning of 2007, which made 2009 the third consecutive year under the new law. Any organization that fails to file for three consecutive years automatically loses its federal tax-exempt status.
Form 990-series information returns are due on the 15th day of the fifth month after an organization’s fiscal year ends. Many organizations use the calendar year as their fiscal year, which makes May 15 the deadline for those tax-exempt organizations. May 15 falls on a Saturday this year so the deadline this year is actually Monday, May 17. Organizations can request an extension of their filing date by filing Form 8868 by the original due date.
Absent a request for extension, there is no grace period from filing by the original due date.
Small tax-exempt organizations with annual receipts of $25,000 or less can file an electronic notice Form 990-N (e-Postcard). This asks for a few basic pieces of information. Tax-exempts with annual receipts above $25,000 must file a Form 990 or 990-EZ, depending on their annual receipts. Private foundations file form 990-PF.
Any tax-exempt organization that has not filed the required form in the last three years automatically will lose its tax exempt status effective as of the due date of the annual filing. Under the law, the IRS does not have discretion in this matter.
A list of revoked organizations will be available to the public on IRS.gov.
If an organization loses its exemption, it will have to reapply with the IRS to regain its tax-exempt status. Any income received between the revocation date and renewed exemption may be taxable.
For more information, see the Exempt Organizations: Status Revoked for not Filing Annual Returns or Notices page on this website; or the ABC's for Exempt Organizations page.
The Pension Protection Act of 2006 mandates that all non-profit organizations, other than churches and church related organizations, must file an information form with the IRS. This requirement has been in effect since the beginning of 2007, which made 2009 the third consecutive year under the new law. Any organization that fails to file for three consecutive years automatically loses its federal tax-exempt status.
Form 990-series information returns are due on the 15th day of the fifth month after an organization’s fiscal year ends. Many organizations use the calendar year as their fiscal year, which makes May 15 the deadline for those tax-exempt organizations. May 15 falls on a Saturday this year so the deadline this year is actually Monday, May 17. Organizations can request an extension of their filing date by filing Form 8868 by the original due date.
Absent a request for extension, there is no grace period from filing by the original due date.
Small tax-exempt organizations with annual receipts of $25,000 or less can file an electronic notice Form 990-N (e-Postcard). This asks for a few basic pieces of information. Tax-exempts with annual receipts above $25,000 must file a Form 990 or 990-EZ, depending on their annual receipts. Private foundations file form 990-PF.
Any tax-exempt organization that has not filed the required form in the last three years automatically will lose its tax exempt status effective as of the due date of the annual filing. Under the law, the IRS does not have discretion in this matter.
A list of revoked organizations will be available to the public on IRS.gov.
If an organization loses its exemption, it will have to reapply with the IRS to regain its tax-exempt status. Any income received between the revocation date and renewed exemption may be taxable.
For more information, see the Exempt Organizations: Status Revoked for not Filing Annual Returns or Notices page on this website; or the ABC's for Exempt Organizations page.
Thursday, May 6, 2010
Bond Attorney Suspended for 24 Months
The Internal Revenue Service has accepted an offer of consent to suspension from bond attorney Michael W. McCall. Under the terms of the settlement agreement, McCall will be suspended from practice before the IRS for at least 24 months for writing a false tax opinion. Thereafter, he may petition for reinstatement.
“Practitioners have a duty to their clients, the system, and the municipal finance bond community to ensure that the tax advice they are giving their clients complies with the law and is complete and accurate,” IRS Office of Professional Responsibility (OPR) Director Karen L. Hawkins said.
McCall was engaged by a state of Washington county municipal sewer district to act as co-bond counsel and special tax counsel to write an opinion as to the tax-exempt status of the district bonds issued in October 2000 and to perform due diligence with respect to certain transactional matters relating to the bond issuance. The district issued the bonds for its utility local improvement district for a proposed commercial development. The bonds were issued in violation of state law as the utility local improvement district was located outside of the sewer district boundaries. The bonds defaulted and have been determined to be invalid.
The OPR alleged that McCall’s opinion on the tax-exempt status of the district bonds was false under Circular 230, Section 10.51(j), and that McCall's opinion on certain transactional matters was also false under Section 10.51(j). In addition, the OPR alleged that McCall failed to perform due diligence under Circular 230, section 10.22, with respect to transactional matters related to the bond issuance, including an undisclosed payment to him from bond proceeds received by the developer.
Following an OPR investigation, McCall admitted to violations of Circular 230 for giving false opinions, knowingly, recklessly, or through gross incompetence (Treasury Department Circular 230, Section 10.51(j) (2000)), and for failing to exercise due diligence (Treasury Department Circular 230, Section 10.22 (2000)).
The settlement agreement included a disclosure authorization that allowed the IRS to issue this release.
“Practitioners have a duty to their clients, the system, and the municipal finance bond community to ensure that the tax advice they are giving their clients complies with the law and is complete and accurate,” IRS Office of Professional Responsibility (OPR) Director Karen L. Hawkins said.
McCall was engaged by a state of Washington county municipal sewer district to act as co-bond counsel and special tax counsel to write an opinion as to the tax-exempt status of the district bonds issued in October 2000 and to perform due diligence with respect to certain transactional matters relating to the bond issuance. The district issued the bonds for its utility local improvement district for a proposed commercial development. The bonds were issued in violation of state law as the utility local improvement district was located outside of the sewer district boundaries. The bonds defaulted and have been determined to be invalid.
The OPR alleged that McCall’s opinion on the tax-exempt status of the district bonds was false under Circular 230, Section 10.51(j), and that McCall's opinion on certain transactional matters was also false under Section 10.51(j). In addition, the OPR alleged that McCall failed to perform due diligence under Circular 230, section 10.22, with respect to transactional matters related to the bond issuance, including an undisclosed payment to him from bond proceeds received by the developer.
Following an OPR investigation, McCall admitted to violations of Circular 230 for giving false opinions, knowingly, recklessly, or through gross incompetence (Treasury Department Circular 230, Section 10.51(j) (2000)), and for failing to exercise due diligence (Treasury Department Circular 230, Section 10.22 (2000)).
The settlement agreement included a disclosure authorization that allowed the IRS to issue this release.
Monday, May 3, 2010
Tax-Free Employer-Provided Health Coverage Now Available for Children under Age 27
As a result of changes made by the recently enacted Affordable Care Act, health coverage provided for an employee's children under 27 years of age is now generally tax-free to the employee, effective March 30, 2010. The Internal Revenue Service has announced that these changes immediately allow employers with cafeteria plans –– plans that allow employees to choose from a menu of tax-free benefit options and cash or taxable benefits –– to permit employees to begin making pre-tax contributions to pay for this expanded benefit.
COBRA Subsidy Eligibility Period Extended to May 31
Workers who lose their jobs during April and May may qualify for a 65-percent subsidy on their COBRA health insurance premiums, according to the Internal Revenue Service. The American Recovery and Reinvestment Act established this subsidy to help workers who lost their jobs as a result of the recession maintain their employer sponsored health insurance. The Continuing Extension Act of 2010, enacted April 15, reinstated the COBRA subsidy, which had expired on March 31. As a result, workers who are involuntarily terminated from employment between Sept. 1, 2008 and May 31, 2010, may be eligible for a 65-percent subsidy of their COBRA premiums for a period of up to 15 months. In some cases, workers who had their hours reduced and later lose their jobs may also be eligible for the subsidy.
Payroll Changes to Begin Soon
The CLASS program payroll deduction: Starting on January 1, 2011, there is a new employee-paid long-term care assistance plan, the CLASS program (community living assistance services and support).
The benefit: CLASS provides participants at least $50/day to purchase non-medical support and services the person needs to maintain a community residence if he or she has difficulty performing some daily living activities.
How employees pay for coverage: They sign up for voluntary payroll deductions. Employers will have to help administer the program.
Eligible individuals: Employees who have paid into the program for at least 5 years. All working adults are automatically enrolled and must opt out if they do not want to participate.
HSAs, FSAs, similar plans: Starting on January 1, 2011, the definition of "medical expense" changes for FSAs, HSAs and Archer MSAs. Over the counter drugs not prescribed by a doctor are not reimbursable tax free.
Only those medications prescribed by a doctor can be reimbursed through any of the above — even if a drug that is normally prescribed is also available over the counter.
The change does not affect items such as bandages, braces, etc., which remain reimbursable tax-free.
Additions to W-2s: For taxable years beginning after December 31, 2010, the cost of employee-sponsored health coverage must be included on W-2s.
Changes after 2010
Future periods covered: Tax years 2014-2015.
Future amount of credit: Up to 50%.
Employers that qualify: Same maximum credit and phase-out range. Coverage purchased through state insurance exchanges to br created under the law qualifies for the credit.
The Medicare payroll tax: In 2013, the rate increases to 2.35% for singles earning over $200,000 and couples filing jointly earnings at least $250,000. High earners will pay 3.8% for Medicare on net investment income. Employers must withhold additional Medicare tax or 0.9% on wages over $200,000, but there is no employer Medicare tax on this. The IRS is deciding how to implement the change.
2014 medical insurance requirement: Starting January 1, 2014, employers with more than 50 employees will be required to offer coverage, or pay a fee of at least $2,000 per full-time employee.
Employers with more than 200 employees will have to automatically enroll employees in health insurance plans offered by the employer, but employees may opt out of the coverage.
HSAs, FSAs, and similar plans: As of January 1, 2013, contributions to FSAs for medical expenses will be limited to $2,500 a year (currently $3,050).
Itemized deductions limited: As of tax years beginning January 1, 2013, itemized medical expenses are deductible only to the extent that they exceed 10% of AGI. The current 7.5% of AGI is retained for individuals age 65 and older for tax years 2013-2016.
The benefit: CLASS provides participants at least $50/day to purchase non-medical support and services the person needs to maintain a community residence if he or she has difficulty performing some daily living activities.
How employees pay for coverage: They sign up for voluntary payroll deductions. Employers will have to help administer the program.
Eligible individuals: Employees who have paid into the program for at least 5 years. All working adults are automatically enrolled and must opt out if they do not want to participate.
HSAs, FSAs, similar plans: Starting on January 1, 2011, the definition of "medical expense" changes for FSAs, HSAs and Archer MSAs. Over the counter drugs not prescribed by a doctor are not reimbursable tax free.
Only those medications prescribed by a doctor can be reimbursed through any of the above — even if a drug that is normally prescribed is also available over the counter.
The change does not affect items such as bandages, braces, etc., which remain reimbursable tax-free.
Additions to W-2s: For taxable years beginning after December 31, 2010, the cost of employee-sponsored health coverage must be included on W-2s.
Changes after 2010
Future periods covered: Tax years 2014-2015.
Future amount of credit: Up to 50%.
Employers that qualify: Same maximum credit and phase-out range. Coverage purchased through state insurance exchanges to br created under the law qualifies for the credit.
The Medicare payroll tax: In 2013, the rate increases to 2.35% for singles earning over $200,000 and couples filing jointly earnings at least $250,000. High earners will pay 3.8% for Medicare on net investment income. Employers must withhold additional Medicare tax or 0.9% on wages over $200,000, but there is no employer Medicare tax on this. The IRS is deciding how to implement the change.
2014 medical insurance requirement: Starting January 1, 2014, employers with more than 50 employees will be required to offer coverage, or pay a fee of at least $2,000 per full-time employee.
Employers with more than 200 employees will have to automatically enroll employees in health insurance plans offered by the employer, but employees may opt out of the coverage.
HSAs, FSAs, and similar plans: As of January 1, 2013, contributions to FSAs for medical expenses will be limited to $2,500 a year (currently $3,050).
Itemized deductions limited: As of tax years beginning January 1, 2013, itemized medical expenses are deductible only to the extent that they exceed 10% of AGI. The current 7.5% of AGI is retained for individuals age 65 and older for tax years 2013-2016.
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