Preeo, Silverman, Green & Egle, P.C.

Tax Library

A Review of Tax-Related Provisions of the HIRE Act

y Steven M. Weiser, J.D., LL.M. (Taxation)

On March 18, 2010 President Obama signed into law the Hiring Incentives to Restore Employment (“HIRE”) Act.

Section 179 Expensing for Small Businesses

Section 179 of the Internal Revenue Code provides qualifying businesses with the option of immediately deducting the cost of business machinery and equipment, instead of recovering these costs via depreciation over a period of years.  The HIRE Act extends aspects of Section 179 that were in place for 2008 and 2009.  Specifically, the maximum amount a business may expense remains at $250,000, and the option to expense these costs begins to phase out with a business buys more than $800,000 of assets eligible for expensing under Section 179.

Payroll Tax Holiday and Credit For New Hires

To help stimulate the hiring of previously unemployed workers, any private sector employer that hires an individual that was previously out of work for at least 60 days is exempt from having to pay the employer’s 6.2% share of Social Security payroll taxes as it relates to that employee for the remainder of 2010.  Since these taxes are only imposed upon the first $106,800 of wages, the most an employer can save is $6,621 per new employee.  Additionally, for any new employee hired under this initiative that the employer keeps on payroll for a continuous period of 52 weeks, the employer is eligible for a non-refundable tax credit of up to $1,000 after the 52-week threshold is attained; provided, the employee’s pay in the second 26-week period is at least 80% of the pay in the first 26-week period.  The credit can be taken on the employer’s 2011 tax return. 

Employer’s should note that employees hired after February 3, 2010 (the date the HIRE Act was initially introduced in Congress) are eligible for the payroll tax holiday and tax credit, but wages paid after March 18, 2010 are eligible for the payroll tax holiday.

Other items of note:

• There is no minimum weekly number of hours an employee must work for the employer to be eligible for either the payroll tax holiday or tax credit.
• Family members do not qualify for the payroll tax holiday or tax credit.
• If the new hire replaces another employee who performed identical job functions, the employer is only eligible for the payroll tax holiday and tax credit if the prior employee left the job voluntarily or was terminated for cause.
• The new hire must sign an affidavit (new IRS Form W-11) stating under penalties of perjury that he or she was not employed more than 40 hours during the 60-day period preceding the new employment.
• If the employer has paid payroll taxes for the first quarter of 2010, the amount by which Social Security taxes would have been reduced under the HIRE Act for the first quarter will be applied against the employer’s tax liability for the second quarter of 2010.

To pay for these tax benefits Congress passed several offsetting revenue raisers focused primarily on offshore compliance with U.S. tax laws.

New Disclosure Requirements for Offshore Holdings

The HIRE Act imposes a 30% withholding tax on income from U.S. financial assets held by a foreign institution unless the foreign institution discloses the identity of any U.S. individuals with accounts at such institution.  Additionally, the foreign institution would have to disclose and the annual account balances, gross receipts and gross withdrawals and payments from the accounts.  These provisions are applicable for payments made to the institutions after 2012.

Foreign entities must also provide withholding agents with the names and contact information for any U.S. individuals that are substantial owners of any foreign entity, and the withholding agents are required to provide this information to the U.S. Treasury Department.  Publicly held entities are not required to report this information.

Bearer bonds are bonds that do not have an official record of ownership.  These bonds are prone to tax avoidance because they allow taxpayers to invest anonymously.  Congress has taken steps in the past to eliminate bearer bonds from the U.S. market.  The HIRE Act extends many of Congresses efforts to bearer bonds that U.S. issuers market to foreign investors.  It also prevents the U.S. government from issuing any bearer bonds.  These provisions apply to debt issued after March 18, 2012.

Individuals must now disclose on their tax returns the existence of offshore accounts and other offshore financial assets with values of $50,000 or more.  A penalty of $10,000 can be assessed for each tax year such assets are not reported.  The penalty can be increased if the Treasury Department notifies an individual by mail of the failure to disclose and the taxpayer continues the failure to disclose.  Additionally, a penalty of 40% applies to any understatement of income that is attributable to undisclosed foreign financial assets.

A new six-year statute of limitations period applies with respect to any tax return omission that exceeds $5,000 and is attributable to one or more reportable foreign assets.  The statute of limitations does not begin to run until the taxpayer files the return disclosing the taxpayers foreign assets.

Passive Foreign Investment Companies

Effective March 18, 2010, each shareholder in a passive foreign investment company (“PFIC”) must file an annual information return for the PFIC.  As of the date of this article the IRS has not produced a draft of the new information return.

Foreign Trusts

The HIRE Act codifies and clarifies rules used to determine when a U.S. person is treated as the owner of property held by a foreign trust.  In general, U.S. tax laws treat a U.S. person as the owner of property held in a foreign trust if the trust has a U.S. beneficiary.  According to existing treasury regulations a trust has a U.S. beneficiary if any current, future or contingent beneficiary of the trust is a U.S. person.  This regulation is now a part of the Internal Revenue Code effective March 18, 2010.  Additionally, the HIRE Act clarifies that a foreign trust has a U.S. beneficiary if (1) any person has discretion to determine the beneficiaries of the trust, unless the trust agreement identifies a class of potential beneficiaries, none of which are U.S. persons, or (2) any written or oral agreement could result in a U.S. person becoming a beneficiary of the trust.  Finally, the HIRE Act provides that the use of trust property is treated as a payment from the trust in an amount equal to the fair market value of such property or such use.

The HIRE Act also provides a new presumption that a U.S. beneficiary exists.  Effective March 18, 2010, if a U.S. person directly or indirectly transfers property to a foreign trust (other than a trust established as a charitable trust or for deferred compensation purposes), the IRS may treat the trust as having a U.S. beneficiary, unless it can be established to the IRS’s satisfaction that (1) no trust property can be paid or accumulated for the benefit of a U.S. person under the terms of the trust, (2) no trust property would be distributable to a U.S. person if the trust were terminated during the year, and (3) the transferor provides any additional information the IRS requires with respect to the transfer.

If a taxpayer fails to file an information return concerning certain transactions with foreign trusts (e.g., the creation of a foreign trust, transfer of money or property to a foreign trust, death of a U.S. owner of a foreign trust, etc.) the penalty for failing to disclose this information is increased as a result of the HIRE Act to a minimum of $10,000 and in no event may the amount of the penalty exceed the amount required to be disclosed on a return.  This provision applies to any disclosures or returns required to be filed with the IRS after December 31, 2009.

Dividend Equivalents

For payments made on or after September 14, 2010, the HIRE Act treats a dividend equivalent as a divided from U.S. sources for certain purposes, including but not limited to U.S. withholding rules applicable to foreign persons.  A dividend equivalent is any substitute payment for a dividend that is made pursuant to a securities lending or sale-repurchase transaction that is contingent upon (or determined with reference to) the payment of a dividend from sources within the U.S.  It may also be a payment made under a notional principal contract that directly or indirectly is contingent upon (or determined with reference to) the payment of a dividend from sources within the U.S.  A dividend equivalent may also include any payment the IRS determines to be substantially similar to any of the payments previously described.