United States: HIRE Act Offers Federal Tax Incentives to Expand Workforces

While the stock markets have experienced a positive upward trend during 2010, high unemployment rates continue to plague much of the United States. Several recent economic reports, including reports emanating from the federal government, continue to warn that unemployment rates may remain at unprecedented levels throughout 2010. In order to spur job growth, Congress has enacted legislation aimed at stimulating hiring. The job growth bill, known popularly by the moniker the HIRE Act (Hiring Incentives to Restore Employment Act of 2010) (P.L. 111-147), will usher in several new tax law rules. On March 10, 2010, one day after Congress enacted the HIRE Act, President Barack Obama signed the act into law.

As the gaming industry begins to rebound, as demonstrated financial data evidences that falling gaming revenue may be starting to subside, the tax incentives created by the HIRE Act may be beneficial to gaming-related businesses. The key tax incentives of the HIRE Act are summarized.

The HIRE Act, among other matters, offers new tax incentives directed at encouraging businesses to hire and, ultimately, retain unemployed workers. The HIRE Act also expands the availability to expense the costs of certain assets and the expansion of popular public finance bond programs. The tax incentives span three different categories which may bring some tax benefits to businesses:

1. creation of an employer "payroll tax holiday";

2. a modest tax credit for employers that retain new hires for at least one year; and

3. increasing the availability to expense certain assets under Section 179 of the Internal Revenue Code of 1986, as amended ("IRC").

Payroll Tax Holiday

The use of a "tax holiday" has been popular in the northeastern United States. The general notion behind a tax holiday is that a state or other local government will designate specific days of a year when, for example, sales tax will not be imposed on purchases of consumer merchandise, such as clothing. The underlying purpose of a tax holiday is to stimulate purchases of merchandise and, correspondingly, help local businesses attract customers who otherwise would head to a mega-mall across the river. While many businesses would prefer permanently reduced tax rates to spur economic activity, the HIRE Act does provide a gift that should not be entirely discounted – particularly if a business intends to hire several new employees.

The HIRE Act payroll tax holiday provides relief for the employer portion of Federal Insurance Contribution Act ("FICA") taxes. FICA consists of two separate taxes: (1) the Old Age, Survivors and Disability Insurance ("OASDI") tax; and (2) the Medicare Hospital Insurance ("HI") tax. The FICA taxes are imposed separately on employers and employees. Self-employed individuals pay an alternative tax which is essentially equal to both the employer and employee portion of the FICA taxes. Employers pay FICA taxes on wages paid in connection with employment, while employees pay FICA taxes on wages received. The employer portion of the OASDI tax is currently equal to 6.2% of the wage base. The wage base for 2010 is capped at $106,800. The HI tax rate is presently equal to 1.45% on wages paid and is not subject to a wage cap.

The HIRE Act payroll holiday grants certain employers, which the act defines as "qualified employers," relief from the employer's share of OASDI in 2010 for wages paid to "qualified individuals." The tax holiday lasts for the period beginning March 19, 2010 and ending December 31, 2010. A "qualified individual" must perform services (1) in the trade or business of a qualified employer, or (2) in furtherance of an exempt purpose of a qualifying tax-exempt organization. For purposes of the payroll tax holiday, a "qualified employer" is defined as any business other than a governmental unit. A "qualified individual" is any person who:

1. begins employment after February 3, 2010 and before January 1, 2011;

2. certifies, under penalties of perjury, that the person has not been employed for more than 40 hours during the 60-day period ending on the date he or she begins employment;

3. is not employed to replace another employee, unless such employee voluntarily separated from employment or was terminated for cause; and

4. is not a "related person" to the employer.

The maximum credit available under the payroll holiday is $6,621.60, which is the product of the employer portion of the OASDI tax multiplied by the 2010 wage base. The credit is not available for the payroll tax installment payment paid in the first quarter of 2010. Employers will, however, receive a credit against the second quarter installments equal to the credit the employer would otherwise have received for the first quarter. An employer can affirmatively elect out of the payroll holiday. The election out of the payroll tax holiday would allow the employer to remain eligible for the Work Opportunity Tax Credit.

A Modest $1,000 Credit for Retained Workers

The second credit for employers created by the HIRE Act increases the general business credit under IRC § 38 by up to $1,000 for each "retained worker." A "retained worker" is a person (1) employed by the business on any date during the tax year, (2) employed for a period of not less than 52 consecutive weeks, and (3) whose wages during the last 26 weeks equal at least 80% of the wages paid during the first 26 weeks. From a planning perspective, employers will need to implement recordkeeping procedures to track hired employees in order to establish which employees that a business claims a credit for satisfy the definition of "retained worker."

Increased Section 179 Expensing

Under the HIRE Act, a business may elect to expense the cost of qualifying property under IRC § 179. Property eligible for IRC § 179 expensing includes tangible personal property used in an active trade or business and certain computer software placed in service prior to 2011. Such property would otherwise be subject to depreciation or amortization. Under prior law, a business could expense under IRC § 179 a maximum of $134,000 in eligible property, with this limitation being reduced dollar-for-dollar for the cost of eligible property that exceeded $540,000. The HIRE Act increases the IRC § 179 limitation to $250,000, which is reduced dollar-for-dollar for the cost of eligible property that exceeds $800,000.

Conclusion

While the tax incentives created by the HIRE Act appear modest, on an aggregate employee-by-employee basis, the incentives may be amplified for businesses that anticipate expanding work forces in 2010. In addition to the employment-related tax incentives, the expansion of IRC § 179 expensing offers an inducement for businesses to make capital purchases that have otherwise been delayed due to the current economic climate. Now may be an opportune time for businesses to examine their current federal tax positions and consult with tax advisors to assess the availability of any of the tax incentives of the HIRE Act.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.