McKonomics

The 2010-2011 Pennsylvania State Budget

Less than a week after the due date, Governor Ed Rendell signed his final Pennsylvania state budget at Elmwood Elementary School in Mechanicsburg, Pennsylvania, emphasizing the Commonwealth's continued commitment to education. His budget displayed this fact in that it brought about a $250 million increase in basic education spending. However, overall spending for many programs was significantly decreased due to lower revenue expectations.

 

The 2010-2011 enacted state budget is built on a few assumptions. Pennsylvania anticipates an additional $850 million from the federal government for Pennsylvania's Medicaid program. Currently, the U.S. Congress has not yet allocated these funds. The General Assembly and the Rendell administration agreed to meet this October to pass a severance tax on the extraction of natural gas from the Marcellus Shale which would be effective January 1, 2011. 

Does Your Organization Qualify for the New Health Tax Credit?

The recently enacted healthcare legislation includes a new tax credit for qualifying small employers. The credit can cover up to 35 percent of employee health insurance costs. It is available for tax years beginning in 2010, and can be claimed for eligible costs incurred before the healthcare legislation became law.

 

Does your company qualify for the credit? As with most tax topics, there's no simple answer. Here are the qualification rules.

 

Basics About the Credit

Hiring Summer Help? Tax Breaks and Rules to Keep in Mind

With the summer now here, you may be expanding your workforce to accommodate increased seasonal demand. Fortunately, there's usually a good source of available labor, including high school and college students, workers recently laid off, and retirees looking to pick up some extra cash. You might even keep summer interns on board longer if they work out to your satisfaction.

 

Be aware that certain legal requirements apply when you add summer help to the staff. In particular, your business must comply with federal and state laws regarding minimum pay standards, workers' compensation and discriminatory practices (see right-hand article). However, if you stay within the legal boundaries, you can realize extra tax benefits for hiring certain workers this summer.

 

The three main tax breaks for employers are the Work Opportunity Tax Credit (WOTC), the payroll tax exemption for previously-unemployed workers and the new tax credit for retaining those workers:

Two Valuable Hiring Incentives

Keeping money in the family is always a worthy goal. If you're a business owner, one way to accomplish this is to hire relatives. As an added bonus, if you act quickly, you might qualify for two temporary payroll tax breaks. Here is what you need to know.

 

Social Security Tax Break for New Hires

 

The Hiring Incentives to Restore Employment (HIRE) Act grants a temporary employer Social Security exemption for wages paid by a qualified employer to an eligible new employee between March 19 and December 31, 2010. Specifically, such wages are exempt from the 6.2 percent employer portion of Social Security tax that your business pays as part of the FICA tax.

SEP IRA - The Basics

Over the past few years, many taxpayers have made the switch from employee to self-employed. Although much can be gained from that change, there are also a few things that can be lost, including being covered by an employer's retirement plan.

 

The SEP IRA is a retirement plan designed to benefit self-employed individuals and small business owners. Sole proprietorships, S and C corporations, partnerships and LLCs qualify.

 

SEP IRA contribution limits

 

In 2010 a SEP IRA has a contribution limit of $49,000. Contributions to a SEP IRA are generally 100% tax deductible and investment earnings in a SEP IRA grow taxed deferred. Withdrawals after age 59 1/2 are taxed as ordinary income. Withdrawals prior to age 59 1/2 may incur a 10% IRS penalty as well as income taxes.

Watch Out for Unexpected Tax

Stockholders who lend money to their C corporations are expected to charge interest on the loan at the market rate. Those who charge less -- or nothing -- can be taxed as if they charged interest at a rate that is periodically determined by the IRS under federal law.

 

You already know that taxes can be imposed on money taken out of your C corporation. But not all business owners know they can also be taxed on money put into the corporation in the form of a loan.

 

Specifically, the difference between that interest rate and the lesser (or zero) rate actually charged by a stockholder is taxable to the stockholder as interest income. The corporation is also allowed a corresponding deduction.

 

This "below market loan" rule is triggered once the total loan balance goes over $10,000. Paying your corporation's bills, without getting reimbursed, also counts as a loan.

 

The IRS is alerted to these type of loans by the corporation's tax return, which asks about "loans from stockholders." Here are three quick tips to avoid problems:

 

· Review any loans or expense advances made to your corporation. Consider whether the outstanding balance should be reduced to $10,000 or less.

 

· You may want to convert all, or part, of the loan to a capital contribution or purchase of stock. Consult with your tax adviser about the best way to capitalize your business.

 

· Consider formalizing the transaction by fixing an interest rate and payment schedule. Your tax adviser can suggest an acceptable interest rate that will stop the IRS from taxing you at a higher rate later if interest rates rise while the debt is outstanding.

 

· Keep good records showing that loan payments were made on schedule.

Corporations: Good Time for Tax-Wise Transactions (Take Advantage of Historically Low Rates Now)

If you own shares in a closely-held C corporation, you probably know the 2010 federal income tax rate structure is quite favorable for these reasons:

 

· If your company pays you a taxable dividend this year, the maximum federal income tax rate is only 15 percent; and

 

· That same 15 percent maximum rate applies to 2010 corporate payouts or stock sales that generate long-term capital gains. 

 

Dividend and Capital Gains Taxes Are Almost Certain to Go Up

 

With the passage of the massive healthcare bill, odds are the current taxpayer-friendly picture will only last through the end of this year. Unless Congress takes action to extend the status quo, higher taxes on dividends and long-term gains will kick in on January 1, 2011, when the "Bush tax cuts" are scheduled to expire.

New Case May Create Refund Opportunity for Severance Pay (Court Rules that Severance Payments Are Not Wages)

A recent U.S. District Court case may provide a unique tax-saving opportunity for employers who have been forced to lay off workers during the recent economic downturn.  In a surprising move, the Court said that severance payments made to the workers do not constitute "wages" for payroll tax purposes. Thus, the company was able to collect a refund of more than $1 million!

 

In the wake of this new case, you can file a protective refund claim for open tax years if your company previously paid the full amount of payroll taxes on severance payments. But you may have to act fast to file a claim for the 2006 tax year.

 

Let's start with some basics. As a general rule, "wages" that are subject to income tax withholding are also treated as wages for employment tax purposes. For 2010, an employee must pay a 6.2 percent Social Security tax on the first $106,800 of wages and a 1.45 percent Medicare tax on all wages. The employer must also pay its corresponding share of these employment taxes.

Key Changes in the New Healthcare Law

The new Patient Protection and Affordable Care Act of 2010, and its accompanying reconciliation law, provide broad-based changes for employers as well as many individuals. In addition to virtually mandating health insurance coverage for all U.S. citizens, this massive health care reform legislation includes several other far-reaching tax provisions.

 

The changes generally take effect over time -- in some cases, you won't see them for two to four years. But advance planning can maximize tax advantages for some and minimize tax disadvantages for others.

 

Here's a brief summary of some of the provisions.

New Hiring and Retention Incentives For Employers

On March 18, 2010, President Obama signed the new Hiring Incentives to Restore Employment Act (HIRE) into law. This federal legislation creates brand-new tax breaks for hiring and retaining unemployed workers, extends the enhanced business equipment deduction that was available last year, and reinforces the "Build America Bond" program.

 

Here's a quick rundown on these three key tax breaks:

 

Employers Get a Payroll Tax Holiday for New Hires -- Plus a Potential Tax Credit Bonus. Normally, an employer is required to pay its share of Social Security taxes on wages earned by employees. For 2010, the portion of the tax is 6.2 percent on the first $106,800 of wages.