BUSINESS TOPICS

This section includes frequently encountered topics relating to small businesses. It discusses business deductions, how to avoid underpayment penalties, 1099s and much more.

New Employee Hiring Incentives & HIRE Act Credit

The “Hiring Incentives to Restore Employment Act of 2010,” more commonly referred to as the “HIRE” Act, was passed by Congress and signed into law by the President in the first quarter of 2010.  The Act provides employers with incentives to hire unemployed individuals.  The provisions of this new legislation apply to workers hired after Feb. 3, 2010, but only for wages paid after March 18 (the date the legislation was signed into law).    

• Payroll Tax Holiday - The law exempts any private-sector employer that hires a worker who had been unemployed for at least 60 days from having to pay the employer's 6.2% share of the Social Security payroll tax on that employee's wages paid from March 19 through December 31, 2010.  Thus, if the newly-hired and previously-unemployed worker earns $106,800 after March 18, 2010 and before the end of the year, the company could save a maximum of $6,621.  This provides the employer with an immediate benefit by reducing the amount the employer must pay in employment taxes.
  
  
• Retention Credit - As an additional incentive, for any qualifying employee hired under this initiative that the employer keeps on payroll for a continuous 52 weeks, the employer is eligible for an additional non-refundable tax credit equal to the lesser of $1,000 or 6.2% of the wages.  Since the 52-week requirement cannot be met until the subsequent year, the credit will be taken on the employer’s 2011 tax return. In order to be eligible, the employee's pay in the second 26-week period must be at least 80% of the pay in the first 26-week period.  This credit is not available for domestic workers.

New Employee Qualifications - Although there is no minimum number of hours that a new employee needs to work in order to qualify for either benefit, an employer cannot claim the new tax breaks for hiring family members.  A worker who replaces another employee who performed the same job for the employer isn't eligible for the benefit, unless the prior employee left the job voluntarily or for cause.  The payroll tax holiday can be claimed for rehiring old workers as long as that worker was terminated due to facts and circumstances, such as a factory closure due to lack of demand for the product.

Employee Documentation – To validate the new hire for the benefits, an employer must have the employee sign an affidavit, under penalties of perjury, 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 IRS provides Form W-11, “Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit,” for this purpose. Employers do not send the completed and signed form to the IRS, but are required to retain it with their other payroll and income tax records.

Interaction with the Work Opportunity Credit (WOTC) – An employer must choose, on an employee-by-employee basis, whether to claim the HIRE benefits or the WOTC; double dipping is not allowed.  The WOTC is in many cases more valuable than the payroll tax holiday, especially for low-wage employees, because it is generally 40% of “qualified first-year wages” of up to $6,000, for a maximum credit of $2,400 per worker.

The payroll tax holiday is equal to 6.2% of wages, and applies only to wages paid through Dec. 31, 2010.  However, the WOTC is harder to qualify for, because the employee must be certified by an agency as belonging to a targeted group.  The main qualification for a payroll tax holiday is that the employee has been unemployed for 60 days, and the employee's affidavit is sufficient for this purpose.

For more information on this topic and other business-related issues, please give this office a call.

Tax Credits for Small Employers Offering Health Coverage

The Patient Protection and Affordable Care Act provides a tax credit for an eligible small employer (ESE) for nonelective contributions to purchase health insurance for its employees. The term "nonelective contribution" means an employer contribution other than an employer contribution pursuant to a salary reduction arrangement.

o 2010 through 2013 – For tax years 2010 through 2013, qualified small employers, generally those with no more than 25 full-time employees with an average annual full-time equivalent wage of no more than $50,000 will be eligible for a tax credit of up to 35% of the cost of nonelective contributions to purchase health insurance for its employees.  (Note, however, that the phase-out of the credit operates in such a way that an employer with exactly 25 full-time equivalent employees or with average annual wages exactly equal to $50,000 is not eligible for the credit The maximum credit is available to employers with no more than 10 full-time equivalent employees with annual full-time equivalent wages from the employer of less than $25,000.

No requirement to be in a trade or business - For tax years beginning in 2010 through 2013, an employer may still be a qualified employer even though the employees of the employer are not performing services in a trade or business, meaning a household employer may be eligible to claim the credit.

o 2014 and Later - In 2014 and later, eligible small employers who purchase coverage through the Insurance Exchange would be eligible for a tax credit for two years of up to 50% of their contribution.

An eligible small employer generally is an employer with no more than 25 full-time equivalent employees employed during its tax year, and whose employees have annual full-time equivalent wages that average no more than $50,000.

The credit percentage that can be claimed varies with the number of employees and average wages. The full amount of the credit is available only to an employer with 10 or fewer full-time equivalent employees and whose employees have average annual full-time equivalent wages (AAEW) from the employer of less than $25,000.

Calculating the credit amount - The credit is equal to the lesser of the following two amounts multiplied by an applicable tax credit percentage (shown in the table below) and subject to the phase-outs discussed later:

(1) The amount of contributions the eligible small employer made on behalf of the employees during the tax year for the qualifying health coverage.

(2) The amount of contributions that the employer would have made during the tax year if each employee had enrolled in coverage with a small business benchmark premium. Contributions under this method are determined by multiplying the benchmark premium by the number of employees enrolled in coverage and then multiplied by the uniform percentage that applies for calculating the level of coverage selected by the employer. (See table below)


Computing the Credit Phase-Out – The full credit is only available to eligible small employers with 10 or less full-time equivalent employees with an average annual full-time equivalent wage (AAEW) of $25,000 or less.  If either or both of these thresholds are exceeded, then the credit is reduced. 

There is no credit reduction if there are 10 or less full-time equivalent employees FTEs with an AAEW of $25,000 or less.

There is no credit if the full-time equivalent employees exceed 25 or the AAEW exceeds $50,000.

To figure the reduction of credit when the limits are exceeded, the number of the employer’s full-time equivalent employees and average annual full-time equivalent wages (AAEW) for the year must be determined.

Figuring the number of full-time equivalent employees - An employer's full-time equivalent employees (FTEs) is determined by dividing the total hours the employer pays wages during the year (but not more than 2,080 hours per employee) by 2,080. The result, if not a whole number, is then rounded down to the next lowest whole number if any (unless the result is less than one, in which case, the employer rounds up to one FTE).



Calculating average annual wages (AAEW) - Average annual equivalent wages is determined by dividing the employer’s total FICA wages (without regard to the wage base limitation) for the tax year by the number of the employer's full-time equivalent employees for the year (rounded down to the nearest $1,000 if need be).



Credit reduction - If the number of full-time equivalent employees exceeds 10 or if AAEW exceed $25,000, the amount of the credit is reduced (but not below zero).  Both reductions can apply at the same time!



Example – Joe owns a small California wood working business and has 12 employees, not counting himself or family members.  The total FICA wages (without regard for wage base limitations) for the year were $297,500 and total hours worked by his employees during the year were 24,400.  None of his employees worked more than 2,080 hours during the year.   Joe made nonelective contributions to purchase health insurance for his employees in the amount of $49,800 for the year.  Joe’s credit is determined as follows:

• Small Business Benchmark Premium (from Table Below) = 12 x 4,628 = $55,536
• Smaller of actual premium paid or Benchmark premium = $49,800
• Tentative credit = $49,800 x 0.35 = $17,430
• Full-time equivalent employees (FTEs) = 24,400/2080= 11.7 rounded down = 11
• Average annual full-time equivalent wages (AAEW) = $297,500/11 = $27,045 rounded down = $27,000
• FTE Reduction = ((11-10)/15) x $17,430 = $1,162
• AAEW Reduction = ((27,000-25,000)/25,000) x $17,430 = $1,394
• Joe’s health insurance tax credit = $17,430 - $1,162- $1,394 = $14,874



Other Issues:

o The credit reduces the employer's deduction for employee health insurance. 

o Special rules apply if the employer benefits from state tax credits or a premium subsidy paid by the state for providing health insurance for its employees.

o Aggregation rules apply in determining the employer. 

o Self-employed individuals, including partners and sole proprietors, 2% shareholders of an S Corporation, and 5% owners of the employer are not treated as employees for purposes of this credit.

o There's a special rule to prevent sole proprietorships from receiving the credit for the owner and their family members. 

o The credit is a general business credit and can be carried back one year and forward for 20 years. However, because an unused credit amount cannot be carried back to a year before the effective date of the credit, any unused credit amounts for taxable years beginning in 2010 can only be carried forward. 

o The credit is available to offset tax liability under the alternative minimum tax. 

o The credit is initially available for any tax year beginning in 2010, 2011, 2012 or 2013. Qualifying health insurance for claiming the credit for this first phase of the credit is generally health insurance coverage purchased from an insurance company licensed under State law.

o For tax years beginning in years after 2013, the credit is only available to an eligible small employer that purchases health insurance coverage for its employees through a State exchange and is only available for a maximum coverage period of two consecutive tax years beginning with the first year in which the employer or any predecessor first offers one or more qualified plans to its employees through an exchange.

Please call this office if you have questions related to Tax Credits for Small Employers Offering Health Coverage.  

What Happens When I Default on a Business Loan?

What does it mean to default on a loan?

A loan default is the failure to meet the financial obligations indicated in the loan agreement that is signed by you and your lender. Often, a loan default translates into the business owner's inability to pay their debts on time. Due to the differences in each loan agreement, default penalties vary. However, the effects of defaulting on the loan fall into two general categories- immediate repercussions and future implications for both you and your business.
 
What are the immediate effects to my business if I default on a loan?

Drop in business and/or personal credit score. Missing your payments and defaulting on your loans negatively impacts your business credit score. Your personal credit score may be affected, depending on the type of business structure that you have in place.  Read on for more tips on how to protect your personal liability.

Increased interest rates. Your business interest rates (and possibly your personal interest rates) may increase if your credit score dips. Depending on your loan agreement, a higher interest rate could affect the loans that you currently have, as well as future loans you plan to seek.

Foreclosure or seizing of property and collateral. Foreclosure may be the most severe repercussion due to a loan default, allowing lenders to recuperate losses from loan defaults. In this situation, your lender will have the full right to take control and ownership of your property and collateral that you have included in your contract. They normally will sell your property privately or by a public auction, depending on the profit margin.

What steps should I take next?

Negotiate terms with your lender. If you default, you can try renegotiating the terms of your loan contract with your lender. While lenders may not always be willing to renegotiate, if you are successful you can minimize the damage to your business's financial health. Ways to reduce the negative impacts of the loan default include:

• Changing the terms of payment, e.g., paying less per installment but for a longer period of time
• Paying less over more time with a higher interest rate
• Asking your lender to forgive a portion of your late payment and agree to pay on time in the future

Consider government debt relief options. There are some government-backed options for managing debt that you can consider, such as the American Recovery and Reinvestment Act (ARRA), ARC Loan Program. and SBA Loan Program. Read more about Managing Small Business Debt through Government Loans and Refinancing Lifelines here.

Cut costs. Minimize your expenses. Though this may not be an ideal situation, you can consider laying off part of your staff and downsizing your business, among others.

Sell business assets. Liquidating business assets or converting your assets into cash may temporarily help you pay off your loans until you can afford to pay your bills on time again.

Consult a lawyer. Consulting a lawyer about your options may also help you through the process. Learn how to find legal representation for your small business here.

What does this mean for the future of my business?

Difficulty finding new loans. After you default on one loan, it will make it much more difficult to find a new loan. If loans are the chief means of financing your business, then you will be running into some difficult hurdles. You may want to start looking into other methods of funding your business. Read more about alternative financing solutions in I Need Money- Where Do I Get It?

Bankruptcy. If your business cannot repay its loans, you may need to file for bankruptcy. Read more about filing for bankruptcy on our blog Bankruptcy Options for Small Business Owners.
 
What Can I Do to Avoid a Loan Default?

Of course, the best way to avoid defaulting is to pinpoint the pitfalls of bad loans and avoid them at all costs. To avoid loan defaults, business owners should remember the following best practices:

• Have a concrete payment plan before you decide to borrow
• Do not offer collateral and property in your contract that you cannot afford to lose
• Read the fine print and thoroughly understand the terms of the contract

Penalties for Failure to File or Furnish Information Returns

Tax law requires businesses to provide information returns, such a 1099s, to each payee that the business has paid $600 or more for the year.  The law also includes penalties for failure to file the same information returns with the IRS.

To ensure compliance with these requirements, there are substantial penalties, and, as part of the Small Business Jobs Act of 2010, those penalties were doubled.  The penalties are generally based upon how late the returns are filed with the IRS or provided to the recipient of the income and are broken down into three tiers:

Tier 1 – Where the returns are filed or provided late but within 30 days of the prescribed due date.

Tier 2 – Where the returns are filed or provided more than 30 days after the prescribed due date and before August 1 of the calendar year in which the filing was required.

Tier 3 – Where the returns are filed or provided after August 1 of the calendar year in which the filing was required.

In addition, the maximum penalties for the year are based on business size determined by the business’s gross receipts.  Businesses with gross receipts of $5 million or less are subject to the small business penalty maximums.

The following table shows the penalties for information returns required to be filed in 2010 and those imposed for returns required to be filed after 2010.




In addition, the minimum penalty for each intentional failure-to-file act increased from $100 to $250.