On Thursday, March 18, 2010, President Obama signed into law the Hiring Incentives to Restore Employment Act (the HIRE Act). The HIRE Act includes the following provisions applicable to businesses:
Provisions Affecting Domestic Activities of U.S. and Non-U.S. Businesses:
One-year extension of enhanced small business expensing. For tax years beginning in 2010, the maximum amount that a taxpayer may expense under Section 179 of the Internal Revenue Code is $250,000 (rather than $125,000), and the expensing election begins to phase out when a taxpayer places in service more than $800,000 (rather than $500,000) of Section 179 property. These increased dollar limits are the same as those in effect for 2008 and 2009.
Payroll tax holiday and up-to-$1,000 credit for employers hiring unemployed workers. The HIRE Act provides two tax incentives for non-governmental employers and public higher education institutions to hire certain unemployed workers:
- First, the employer is exempted from paying its 6.2% share of the Social Security payroll tax on those employees from March 19, 2010 (the day after the date of enactment), through the end of 2010. Any reduction in the employer's payroll tax liability arising in the remainder of the first calendar quarter of 2010 (i.e., on or before March 31, 2010) must be claimed as a credit on the employer's payroll filings for the second calendar quarter of 2010.
- Second, if the worker remains an employee for a continuous 52-week period, the employer is eligible to claim an additional non-refundable tax credit equal to the lesser of $1,000 or 6.2% of the wages the employer pays to the employee during the 52-week period. To qualify for the credit, the employee's pay in the second 26-week period must be at least 80% of the pay in the first 26-week period.
Employers who hire unemployed workers after February 3, 2010 and before January 1, 2011 are eligible for the payroll tax exemption and the retention credit, but only wages paid after March 18, 2010 qualify for the payroll tax exemption. An employer is not eligible for the benefit if the new employee replaces another employee who performed the same job, unless the prior employee left the job voluntarily or for cause. The new employee must sign an affidavit stating that he or she has not been employed for more than 40 hours during the 60-day period ending on the date the employment begins. The new employee also cannot be a family member of the employer or a majority owner of the employer. Wages paid to qualifying employees are not eligible for the Work Opportunity Credit under Section 51 of the Internal Revenue Code unless the employer elects not to have the payroll tax and credit benefits of the HIRE Act apply.
Modified Estimated Tax Payments in 2014 for Large Corporations. The HIRE Act increases the amount of estimated tax payments payable by "large corporations" in 2014. The amount of the required installment due in July, August, or September of 2014 will be 157.75% of the amount otherwise due, and the amount required to be paid in the following installment will be reduced to reflect the amount of the increase in the earlier installment. A "large corporation" is a corporation with at least $1 billion of assets as of the end of the preceding tax year.
Provisions Affecting Foreign Activities of U.S. Businesses:
New Tax and Withholding Regime. The HIRE Act imposes a 30% tax, withheld at the source, on certain payments to foreign financial institutions and certain other foreign nonfinancial entities. The types of payments subject to this new tax are: (1) U.S.-source fixed or determinable annual or periodic ("FDAP") income (e.g., interest, dividends, rents, and royalties); (2) gross proceeds from the sale of property that produces interest and dividend income; and (3) interest on deposits with a foreign branch of a U.S. commercial bank. Foreign financial institutions generally can avoid being subject to this withholding tax by entering into an agreement with the IRS that, among other provisions, generally would require the foreign financial institution to provide information about "U.S. accounts." Subject to certain exceptions, an account constitutes a U.S. account if it is owned by a U.S. person or by a foreign entity in which a U.S. person owns, directly or indirectly, more than 10% of the interests. Other foreign nonfinancial entities generally can avoid being subject to this withholding tax by providing the withholding agent (generally, the person making the payment) with either (1) certification that no U.S. person owns, directly or indirectly, more than 10% of the interests in the entity or (2) the name, address, and taxpayer identification number of each U.S. person that owns, directly or indirectly, more than 10% of the interests in the entity. The withholding tax regime does not apply to certain foreign nonfinancial entities, including publicly traded foreign corporations. The new withholding tax regime generally is effective starting in 2013.
New Reporting Obligation for Specified Foreign Financial Assets. The HIRE Act creates a new reporting obligation for individuals with respect to "specified foreign financial assets," if the aggregate value of the assets exceeds $50,000. For this purpose, specified foreign financial assets are (1) depository or custodial accounts at foreign financial institutions and (2) to the extent not held in an account at a financial institution, (a) stocks or securities issued by foreign persons, (b) any other financial instrument or contract held for investment that is issued by or has a counterparty that is not a U.S. person, and (c) any interest in a foreign entity. A taxpayer satisfies this obligation by including a disclosure statement with the taxpayer's income tax return. Penalties generally apply for failure to make the required disclosure, unless the failure was due to reasonable cause and not willful neglect. It appears that this new requirement is in addition to, and not in lieu of, the otherwise applicable foreign bank account reporting ("FBAR") obligation. The new obligation applies starting in 2011. The HIRE Act also provides that the applicable statute of limitations for the assessment of tax will not expire before three years after the necessary disclosure statement is filed.
New Information Reporting Obligation for U.S. Shareholders of a Passive Foreign Investment Company ("PFIC"). The HIRE Act requires U.S. shareholders of a PFIC, including a PFIC for which a Qualified Electing Fund ("QEF") election is in effect, to file annual information returns providing information as may be required by the IRS. This new reporting requirement is effective as of March 18, 2010. The HIRE Act also provides that the applicable statute of limitations for the assessment of tax will not expire before three years after the necessary disclosure statement is filed.
Increased Penalty and Limitations Period for Understatement of Income Related to Undisclosed Foreign Financial Assets. The HIRE Act increases the general 20% penalty for certain understatements of income to 40% if the understatement of income is attributable to an undisclosed foreign financial asset, as defined by the HIRE Act. In addition, subject to certain limitations, the HIRE Act extends the general three-year statute of limitations for an income tax assessment to six years with respect to assessments for understatements of income attributable to foreign financial assets. The new penalty applies to tax years beginning after March 18, 2010 and the extended limitations period applies to returns filed after March 18, 2010.
IRS Authorized to Require Electronic Filing by Financial Institutions. The HIRE Act allows the IRS to issue regulations requiring financial institutions to electronically file tax returns for taxes withheld by the institution with respect to payments to non-U.S. persons. Such payments would include the new withholding requirement described above related to foreign financial institutions and certain other foreign nonfinancial entities. This authorization is effective for tax returns due, without regard to extensions, after March 18, 2010.
Delay in Application of Worldwide Allocation of Interest. In 2004, Congress enacted a provision allowing a one-time election to allocate interest expenses of domestic members of an affiliated group on a worldwide basis. Generally, the election would reduce the impact of the foreign-source income limitation on the use of foreign tax credits. As modified by subsequent legislation (most recently, the Worker, Homeownership, and Business Assistance Act of 2009), the election was to be available for tax years beginning after 2017. The HIRE Act further delays the effective date of the election until tax years beginning after 2020.
Provisions Affecting U.S. Activities of Foreign Businesses:
Repeal of Benefits to Unregistered Bonds That Satisfy a Foreign Targeted Test. The HIRE Act repeals certain benefits available for foreign-targeted unregistered bonds. Generally, a bond is foreign-targeted if (1) there are arrangements reasonably designed to ensure that the obligation will be sold (or resold in connection with the original issue) only to non-U.S. persons; (2) interest is payable only outside the U.S. and its possessions; and (3) the face of the obligation contains a statement that any U.S. person who holds this obligation will be subject to limitations under the U.S. income tax laws. The disallowed benefits include:
- Qualification for the portfolio interest exception which, subject to certain limitations, generally exempts a non-U.S. person from federal income tax on U.S.-source interest.
- The exception to the general rule disallowing the tax exemption for interest on state or local bonds that otherwise must be registered.
- The exception to the general rule disallowing an interest deduction for the issuer of a bond that otherwise must be registered.
The repeal of these benefits applies to bonds issued after March 18, 2012.
Dividend Equivalent Amounts Treated U.S.-Source Dividends. The HIRE Act treats a dividend equivalent amount as a U.S.-source dividend for purposes of the withholding tax applicable to dividends. The HIRE Act generally defines a dividend equivalent amount as any payment determined by reference to the payment of a dividend by a U.S. corporation, including a payment pursuant to a notional principal contract. Accordingly, a dividend equivalent amount received by a non-U.S. person will be subject to the same withholding obligation otherwise applicable to U.S.-source dividends. This provision takes effect 180 days after March 18, 2010.