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Latest Tax Updates—2009
COBRA Premium Assistance Credit
The American Recovery and Reinvestment Act of 2009 allows a credit against certain employment taxes for providing COBRA premium assistance to assistance eligible individuals. An assistance eligible individual is any qualified beneficiary if at any time during the period beginning on September 1, 2008, and ending on December 31, 2009, the beneficiary is eligible for COBRA continuation coverage, the beneficiary elects coverage, and the qualifying event that allows the beneficiary to get coverage is the involuntary termination of the covered employee's employment during this period. For periods of COBRA continuation coverage beginning after February 16, 2009, a group health plan must treat an assistance eligible individual as having paid the required COBRA continuation coverage premium if the individual elects COBRA continuation coverage and pays 35% of the amount of the premium.
The 65% of the amount of the premium not paid by the assistance eligible individual is reimbursed to the employer or other entity maintaining the group health plan. The maximum period for which the reimbursement can be provided for any beneficiary is 9 months. The reimbursement is made through a credit against employment tax liabilities. The credit is taken on line 12a of Form 941, line 11a of Form 944, or line 13a of Form 943 once the 35% of the premium is paid by or on behalf of the assistance eligible individual. The credit is treated as a deposit made on the first day of the return period (quarter or year).
Anyone claiming the credit for COBRA assistance payments must maintain the appropriate information to support their claim.
New Forms to Adjust Employment Tax Returns
Adjusted employer's quarterly federal tax return or claim for refund. Beginning with errors discovered after 2008, employers must use Form 941-X, Adjusted Employer's QUARTERLY Federal Tax Return or Claim for Refund, to adjust errors discovered on previously filed Forms 941 and 941-SS. Form 941c, which was previously used to adjust errors on Forms 941 and 941-SS and was attached to a currently-filed Form 941 or Form 941-SS, can no longer be used. You are required to file Form 941-X separately from Form 941 or Form 941-SS.
Adjusted employer's annual federal tax return for agricultural employees or claim for refund. Beginning with errors discovered after 2008, employers must use Form 943-X, Adjusted Employer's Annual Federal Tax Return for Agricultural Employees or Claim for Refund, to adjust errors discovered on previously filed Form 943. Form 941c, which was previously used to adjust errors on Form 943 and was attached to a currently-filed Form 943, can no longer be used. File Form 943-X separately from Form 943.
Adjusted employer's annual federal tax return or claim for refund. Beginning with errors discovered after 2008, employers must use Form 944-X, Adjusted Employer's ANNUAL Federal Tax Return or Claim for Refund, to adjust errors discovered on previously filed Forms 944 and 944-SS. Form 941c, which was previously used to adjust errors on Forms 944 and 944-SS and was attached to a currently-filed Form 944 or Form 944-SS, can no longer be used. File Form 944-X separately from Form 944 or Form 944-SS.
Adjusted annual return of withheld federal income tax or claim for refund. Beginning with errors discovered after 2008, employers must use Form 945-X, Adjusted Annual Return of Withheld Federal Income Tax or Claim for Refund, to adjust errors discovered on previously filed Form 945. Form 941c, which was previously used to adjust errors on Form 945 and was attached to a currently-filed Form 945, can no longer be used. File Form 945-X separately from Form 945.
Bonus Depreciation and Section 179 Limits
The American Recovery and Reinvestment Act makes several important changes to the equipment write-off rules, but only for 2009. First, the maximum amount that can be written off under Section 179 is $250,000 and the investment limitation is $800,000 for tax years beginning in 2009.
Second, the 50-percent bonus depreciation deduction for qualifying property has been extended an additional year and applies to property placed in service before January 1, 2010 (January 1, 2011 for certain other property including that with a longer production period). Bonus depreciation is only available for new property and only property depreciable under MACRS with a recovery period of 20 years or less. Bonus depreciation is automatic. You can, however, elect out of it. (You might consider doing so if 2009 is a particularly bad year and you expect to be in a higher bracket in future years.)
Third, the luxury car depreciation caps for vehicles that qualify for bonus depreciation are increased by $8,000 for vehicles placed in service before January 1, 2010. Thus, the limit on cars is $10,960; the limit on trucks and vans is $11,060.
Maximum Automobile Value for Using the Cents-Per-Mile Valuation Rule
For 2009, an employer providing a passenger automobile for the personal use of an employee may determine the value of the personal use by using the vehicle cents-per-mile value rule if the vehicle's fair market value on the date it is first made available to the employee does not exceed $15,000 for a passenger automobile other than a truck or van, or $15,200 for a truck or van.
Estimated Tax Payments for Small Business Owners
There are several ways to avoid a penalty for failure to pay estimated taxes. Most taxpayers avoid the penalty by paying in at least as much as the liability on the prior year's return. For example, your total tax liability for 2008 was $8,000. If you pay at least $2,000 per quarter in 2009, you'll avoid any penalty. If your adjusted gross income on last year's return was more than $150,000, you'll need to pay at least 110% of last year's liability. (If you expect your tax liability to be lower than in the prior year, you can pay estimates based on your annualized, actual income for the year. This involves more computations.)
For tax years beginning in 2009, the 100% (or 110%) requirement for a "qualified individual" is reduced to 90%. A qualified individual is one whose:
· adjusted gross income shown on the individual's prior year tax return was less than $500,000 ($250,000 for a married person filing separately), and
· the individual certifies that more than 50% of the preceding year's gross income was from a small business.
A small business is a trade or business with less than 500 employees on average.
Keep in mind that the other exceptions continue to apply.
Maximum amount subject to tax. The maximum amount of net earnings subject to the social security part of the self-employment tax for tax years beginning in 2009 is $106,800. All net earnings of at least $400 are subject to the Medicare part of the tax.
Optional methods to figure net earnings. For tax years beginning in 2009, the dollar thresholds for using the optional methods to figure net earnings from self-employment have increased. You may use the farm optional method to figure your net earnings from farm self-employment if your gross farm income was $6,540 or less or your net farm profits were less than $4,721. The nonfarm optional method may be used to figure your net earnings from nonfarm self-employment if your net nonfarm profits were less than $4,721 and also less than 72.189% of your gross nonfarm income.
In 2009, the maximum social security coverage under the optional methods is four credits, the equivalent of $4,360 of net earnings from self-employment.
Credit for Employer Differential Wage Payments
Eligible small business employers may be able to claim a credit for differential wage payments made to qualified employees after 2008 and before 2010. The credit is 20% of the first $20,000 of qualified differential wage payments made to each qualified employee. For more information, see Form 8932, Credit for Employer Differential Wage Payments.
Work Opportunity Credit
Two new targeted groups have been added to the work opportunity credit.
· Unemployed veterans.
· Disconnected youth.
Generally, an unemployed veteran is one who has been discharged or released from active duty in the Armed Forces at any time during the 5-year period ending on the hiring date and who receives unemployment compensation for not less than 4 weeks during the 1-year period ending on the hiring date.
A disconnected youth is one who is certified as:
· Being at least age 16 but not age 25 or older on the hiring date;
· Not attending any high school, technical school, or post-secondary school during the 6-month period ending on the hiring date;
· Not being regularly employed during that 6-month period; and
· Not being readily employable due to a lack of having a sufficient number of basic skills.
This applies to employees who begin work after 2008 and before 2011.
Qualified Transportation Fringe Benefits
After 2008, qualified transportation fringe benefits include any qualified bicycle commuting reimbursement.
For any calendar year, the exclusion for qualified bicycle commuting reimbursement includes any employer reimbursement during the 15-month period beginning with the first day of the calendar year for reasonable expenses incurred by the employee during the calendar year.
Reasonable expenses include the purchase of a bicycle and bicycle improvements, repair, and storage. These are considered reasonable expenses as long as the bicycle is regularly used for travel between the employee's residence and place of employment.
Generally, the value of transportation benefits that you provide to an employee during 2009 are excluded from the employee's wages up to the following limits.
1. For combined commuter highway vehicle transportation and transit passes:
a. $120 per month for the months of January and February 2009, and
For any employee, a qualified bicycle commuting month is any month the employee regularly uses the bicycle for a substantial portion of the travel between the employee's residence and place of employment and does not receive transportation in a commuter highway vehicle, any transit pass, or qualified parking benefits.
Generally, qualified transportation fringe benefits are excluded from an employee's wages even if you provide them under a compensation reduction agreement. However, qualified bicycle commuting reimbursements do not qualify for this exclusion if made under a compensation reduction agreement.
Changes to Investment Credit
Generally, the energy credit from the following properties was scheduled to expire after 2008 but has been extended through 2016.
· Qualified fuel cell property.
· Qualified microturbine property.
· Solar energy property.
For tax years beginning after October 3, 2008, the energy credit can offset the alternative minimum tax.
For periods after February 17, 2009, the investment credit includes the qualifying advanced energy project credit.
For periods after 2008, the $4,000 limit on the energy credit for qualified small wind energy is repealed.
You may elect to treat qualified property placed in service as part of a qualified investment credit facility after 2008 as energy property for purposes of the energy credit instead of taking the renewable electricity production credit.
Deferral of Discharge of Indebtedness from Reacquisition of Debt
Income from the discharge of indebtedness is generally taxable. For example, your bank lets you settle an outstanding loan for less than the full face amount. The difference between your payment and the face amount is taxable income.
Discharge of indebtedness income can also result from the acquisition of debt by the business or a party related to the business from a third party. For example, Madison Inc. borrowed $100,000 from Fred Flood (an unrelated party) two years ago. Madison has been paying interest, but the full $100,000 is still outstanding. Sue, the sister of Sharon Armstrong, the sole shareholder of Madison Inc., offers to buy the debt from Fred for $90,000. Madison Inc. has $10,000 of discharge of indebtedness income.
Under The American Recovery and Reinvestment Act, a taxpayer may make an election to include the income from the discharge of indebtedness resulting from the reacquisition of debt in gross income ratably over a five-year period beginning in the fifth tax year following the tax year in which the reacquisition occurs for a transaction occurring in 2009, and the fourth tax year after a reacquisition occurring in 2010. The rules apply to the reacquisition of debt after December 31, 2008 and before January 1, 2011. The rules apply to an applicable debt instrument, that is, a debt instrument issued by a C corporation or any other person in connection with the conduct of a trade or business.
Special rules apply to the deduction for original issue discount in debt-for-debt exchanges, deemed debt-for-debt exchanges, and the acceleration of deferred items.
S Corporation Built-in Gains Tax
To close a loophole, the law imposes a "built-in gains" tax on S corporations that converted from C corporations and sell property that appreciated while being held by the C corporation. For example, Madison Inc. was incorporated in 1980. It bought some land for $20,000. It converted to S corporation status in 2001 when the property had a fair market value of $100,000. If Madison sells that property, any gain up to $80,000 would be subject to the built-in gains tax. Under the law the S corporation can be liable for the tax for 10 years after the conversion to S corporation status. Now, for tax years beginning in 2009 or 2010, no tax is imposed on the net recognized built-in gain of an S corporation after the 7th tax year in the recognition period. For more information, see Section 1374.
Partial Exclusion Increased for Gain From Certain Small Business Stock
Exclusion of gain from the sale of qualifying small business stock is increased to 75% for stock acquired after February 17, 2009, and before 2011.
Withholding on Government Payments
Under a law recently enacted, starting January 1, 2011 federal, state and local governments and all political subdivisions were required to begin withholding at a 3 percent rate on certain payments to persons providing property or services to the governments or other recipients. Under The American Recovery and Reinvestment Act, these withholding and information reporting requirements will be delayed one year and apply to payments made after December 31, 2011.
Election to Claim Accelerated AMT or Research Credit
The American Recovery and Reinvestment Act extends the rule that a corporation may increase its alternative minimum tax or research tax credit by the bonus depreciation amount for qualified property.
New Markets Tax Credit
The American Recovery and Reinvestment Act modifies the new markets tax credit for calendar years 2008 and 2009 by increasing the maximum amount of qualified equity investments allowable.
Qualified Zone Academy Bonds
The American Recovery and Reinvestment Act allows state and local governments to issued qualified zone academy bonds through 2010. The authority to do so would have expired at the end of 2009
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