Mid-Year Update on New and Expiring Tax Provisions

By Lisa M. Cornish, CPA, CMA (Jun, 2010)

In our February 2010 issue of The Focus, William Killory, CPA, discussed the "expiring tax provisions affecting your bottom line". This month we will touch on a few other expiring tax provisions and discuss some newly adopted tax provisions for 2010.

As mentioned in the February newsletter, there are many tax provisions that have expired or are due to expire at the end of 2010. It is still too early to know whether the Obama administration will just sit back and allow these tax cuts to expire or if they will be extended. The word on the street is that the expiring tax provisions that benefit American families earning less than $250,000 a year will most likely be extended, while allowing the provisions that benefit high-income earners to end.

The credit of $1,000 per eligible child reverts back to $500 after 2010. In addition, The Making Work Pay Credit that Obama established for the 2009 and 2010 tax years is set to expire at the end of 2010. The credit currently provides $400 for individuals and $800 for married couples filing jointly.

The original first-time home buyers credit that was claimed for homes purchased in 2008 and is required to be paid back, is set for repayment starting in 2010. The repayment is to be made in 15 equal annual installments for a maximum repayment of $500 per year. If the home was sold or is no longer used as the principal residence within the repayment period, the repayment is accelerated to be fully repaid at the date of sale or when no longer used as the principal residence. There is an exception to repayment if your home was destroyed, condemned, and you did not acquire a new home within 2 years of the event.

The enactment of the "Hiring Incentives to Restore Employment Act of 2010 (HIRE Act)" extended the expanded section 179 expensing election that was due to expire at the end of 2010 as well as added payroll tax breaks and incentives for business to hire unemployed workers.

The section 179 deduction that was set to expire in 2010 was extended to the end of 2010, which means that taxpayers can still deduct up to $250,000 of tangible personal property with a phaseout for property purchased in excess of $800,000 within the year. However, there is currently no provision to extend the bonus depreciation at this time.

The HIRE Act, enacted March 18, 2010 offers two new tax benefits to employers who hire qualified employees after 2/13/10 and before 1/1/11. The first part of the Act is the payroll tax exemption, which allows employers an exemption on their share of social security taxes of 6.2% of qualified employee wages. Qualified employees are those that have been employed no more than 40 hours during the 60 day period immediately preceding employment. The new employee must not replace an existing employee unless the employee left voluntarily or was fired for cause and must not be related to the employer. It is important that employees complete Form W-11 to certify to the above requirements. The form can be found at http://www.irs.gov/pub/irs-pdf/fw11.pdf. The payroll tax exemption is claimed on your Form 941, Employer's Quarterly Federal Tax Return. If you currently use an outside payroll service to manage your payroll and they haven't addressed this exemption, you may want to contact them.

The second part of the act is the HIRE credit. The HIRE credit is a general business credit of up to $1,000 for each qualified retained worker that meets the requirements for the payroll tax exemption and is retained for at least 52 consecutive weeks. In addition, the qualified retained worker must be paid wages for the last 26 weeks of the year that are at least 80% of the wages paid in the first 26 weeks of the year. The HIRE credit will be claimed on your 2011 income tax returns.

The health reform law that became effective in 2010 allows small employers with fewer than 25 full-time equivalent (FTE) employees a credit of up to 35% of employer-paid health insurance premiums. In addition to the FTE requirement, the employee's average annual wages can't exceed $50,000 and the employer must pay at least 50% of the premium for individual coverage. The credit phases out between 10-25 full-time equivalent employees and/or average annual wages of $25,000-$50,000. Each reduction in the credit is calculated separately.

With the ever changing tax laws and the practice of enacting "temporary" provisions that may or may not be extended, it is difficult to make long term estimates. As the end of the year gets closer, we will continue to keep abreast of new legislation to help our clients make informed decisions. In the mean time, if you should need any tax advice or any other services provided by Dermody, Burke & Brown, please contact our office.

 

The information reflected in this article was current at the time of publication. This information will not be modified or updated for any subsequent tax law changes, if any.

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