On March 18th, President Obama signed into law the Hiring Incentives to Restore Employment (HIRE) Act. This act provides tax incentives that will help many companies hire more workers and purchase more equipment — and, ultimately, grow their businesses as the economy recovers. Here’s an overview of the act that will help you determine whether your business might benefit.

Hiring incentives

At the heart of the HIRE act, as indicated by its title, are two provisions designed to reduce unemployment by encouraging businesses to hire unemployed workers — and to retain them:

1. Payroll tax forgiveness. This essentially exempts qualified employers (generally employers other than government entities) from having to pay the 6.2% Social Security portion of Federal Insurance Contribution Act (FICA) taxes on certain new hires through the end of the year. To qualify, a worker must be hired after Feb. 3, 2010, and before Jan. 1, 2011, and must have been unemployed (defined as not having worked more than 40 hours) for the 60-day period ending on his or her start date.

Because wages in excess of $106,800 aren’t subject to the Social Security payroll tax, the maximum value of the break per employee is $6,621.60. Of course, in most cases, the wages will be lower and, thus, the value of the break will be lower. Employers also need to keep in mind that payroll taxes paid are a deductible expense, so some of the savings from the tax forgiveness will be offset by the reduction in deductible expenses.

Here are a few other important considerations related to payroll tax forgiveness:

* The new hire doesn’t have to be a full-time employee. In fact, there’s no minimum hour requirement.
* The new hire can’t take the place of an existing employee unless that employee is terminated for cause or leaves voluntarily.
* The new hire can be an employee who was previously laid off by the employer.
* The new hire can’t be related to the employer or own (directly or indirectly) more than 50% of the business.

Also be aware that employers generally can’t take both payroll tax forgiveness and the Work Opportunity credit for the same employee for the same year. Employers can, however, elect to pay the Social Security tax so that they can take the credit if, for example, the credit would provide a greater tax benefit.

Note –The New York Metropolitan Commuter Transportation Mobility Tax would still apply to the wages paid, as the benefits under the HIRE Act are only applicable to the Federal Social Security Tax and not to other employment related taxes.

2. Retention credit. This credit applies to workers who qualify for payroll tax forgiveness if they are retained for 52 consecutive weeks. The tax savings per qualified retained worker are equal to the lesser of 6.2% of the wages paid to the worker in 2010 or $1,000 (i.e. it applies to the first $16,129 of wages).

Here are a few other important considerations related to the retention credit:

* During the last 26 weeks of the 52-week period, the worker must be paid wages equal to at least 80% of what he or she
  was paid during the first 26 weeks.
* No partial credit is available if the worker leaves before the end of the 52-week period — even if the departure is voluntary.
* Because of the 52-week requirement, employers generally won’t enjoy the benefit from this credit until they file their 2011
   tax returns (which will be filed in 2012).

Additional rules apply to both of these breaks, so please contact us to determine whether and to what extent your business can benefit.

Asset acquisition incentives

The Sec. 179 expensing election allows a current deduction for newly acquired assets that otherwise would have to be depreciated over a number of years. To spur additional investment, the HIRE Act extends the increase in the Section 179 limit for initial year expensing to $250,000 (from $134,000).

Because this tax break is designed to benefit primarily smaller businesses, the expensing election begins to phase out dollar for dollar when total asset acquisitions for the tax year exceed $800,000 (up from $530,000). So, for example, if your asset purchases equal or exceed $1,050,000 for the year, the ability to expense the cost of fixed assets acquired would be fully phased out.

The higher limits apply for calendar year 2010 or a business’s fiscal year that begins in 2010. A business can claim the expensing election only to offset its net income, not to reduce net income below zero, nor to increase a loss.

Because the Sec. 179 limit increases can provide large 2010 deductions, if your business would qualify for this break, you may want to consider making major asset purchases this year.

It is important to note that the HIRE Act does not extend the 50% bonus depreciation that was available in 2008 and 2009. So there is less of a tax incentive for companies whose asset purchases for the year exceed the Sec. 179 acquisition limit to make additional purchases.

Foreign Account Tax Compliance

The HIRE Act also has made significant changes affecting foreign trusts, trustees and beneficiaries, as well as imposing additional reporting requirements for US taxpayers with foreign accounts. If you are the grantor of a foreign trust, a beneficiary of a foreign trust, or own any securities in a foreign entity (except for securities traded on a public exchange and held at a U.S. financial institution), please contact us to discuss the tax reporting under the current rules. Failure to comply with these complex rules may result in substantial monetary penalties (or worse).

Other provisions

The HIRE Act includes additional provisions that may be of interest to you, such as:

* A new election to convert tax credit bonds to Build America Bonds,
* Extension of highway and transit programs through 2010, and
* Deferral of implementation of “worldwide allocation of interest” to 2020.

Various changes to estimated tax payment requirements for certain large corporations also were included in the act, but they don’t go into effect until 2014 or later.