The New Worker, Homeownership, and Business Assistance Act of 2009

In this issue we address the most recent developments in federal and California legislation that will affect many businesses as well as individuals. As the recession continues to linger, the Congress renewed and enhanced some of the existing tax benefits enacted earlier this year to lend a hand to individual and corporate taxpayers on their path to recovery. Yet, a House-passed health care reform bill includes many tax crackdowns on individuals and employers. We discuss the most recent law developments in depth below.

Need a Quick Infusion of Cash Influx for Your Business?

Income Taxes Paid Years Ago May Be Coming Back To You

The new “Worker, Homeownership, and Business Assistance Act of 2009″ signed by President Obama on November 9 into law gives corporations a chance to apply net operating losses to income generated in profitable years, going back to 2003. The new statute extends a small-business tax benefit for another year and lifts a cap of $15 million in annual revenues, this making it available to midsize and large businesses.

Specifically, the extended rules enable companies to take NOLs from either calendar or fiscal 2008 or 2009 tax years, and apply those losses to taxable income going back as far as 2003 or 2004, respectively. That results in recalculation of the company’s tax bill on a lowered taxable income for the prior years and collection of tax refunds from the government. This ability to recoup cash taxes will permit companies to sustain business operations and make investments during uncertain economic times.

The IRS has announced that it will shortly issue guidance on how to cash in on the new law. In the past, companies have collected NOL refunds in one of two ways. The quickest way has been to file a “tentative” claim with the IRS and wait for the agency’s ruling during a six-week processing. Alternatively, a more time-consuming method was filing an amended return for the earlier year.
We at Perisho are committed to assisting our clients in reaching their financial goals and are looking whether your business may be eligible for cash refunds under the Act.

Own a Home and Looking to Downsize?

A Tax Credit May Be Available for You

The ‘’Worker, Homeownership, and Business Assistance Act of 2009’’ has also extended and liberalized the First-Time Homebuyer Credit by making it available to higher-income taxpayers and to existing homeowners who buy another principal residence. The deadline has been extended through July 1, 2010, but the purchase price of a new home was capped at $800,000. Thus, given real estate values of many California’s localities, the credit is basically limited to home-buyers who consider downsizing their existing principal residence.

To qualify for the $6,500 tax credit, a taxpayer must have maintained the same principal residence for any 5-consecutive year period during the last 8 years. Since the AGI phase-out range has been raised to $125,000 – $145,000 (for single taxpayers), $225,000 – $245,000 (for married filing jointly), it might make sense to wait to defer the purchase until early next year. There’s no requirement for the existing principal residence to be sold in order to qualify for a FTHTC on the replacement principal residence. The replacement residence can be purchased to beat the new deadlines under the Act before the old home is sold. The prior principal residence can be retained in the hope of achieving a better selling price later on.

Health Care Reform Fundamentally Changes Health-Care Related Tax Rules

The “Affordable Health Care for America Act” passed by the House of Representatives on November 7 would substantially alter the ways in which employers provide health coverage to employees. It also would require most people to get health coverage or pay a penalty tax and hit high earners with a surtax. The following is the summary of the key tax-related provisions in the House bill.

For tax years beginning after 2012, employers would have to either provide health insurance to their employees or make a contribution to help fund affordable health insurance. Those choosing to offer coverage would have to contribute at least 72.5% of premiums for workers, 65% for families. Employers not offering qualified coverage would pay a payroll tax equal to 8% of their payroll to help cover expenses of employees who seek coverage through the exchange. Small businesses with annual payrolls below $500,000 would be exempt from coverage requirements and the payroll tax. The 8% contribution requirement would be phased in for small businesses with an annual payroll between $500,000 and $750,000. For the first two years that an employer offers qualified coverage, tax credits would be available for businesses with 10 or fewer employees and less than $20,000 in average wages.

Individuals would be required to obtain health insurance coverage or pay an additional tax equal to the lower of 2.5% of their AGI above the filing threshold or the average premium on the insurance exchange.

Starting in 2011, the penalty on distributions from health savings accounts that are not used to pay for medical expenditures would be increased from 10% to 20%. Nontaxable reimbursements from health flexible spending accounts, health reimbursement arrangements, and health savings accounts would exclude over-the-counter medications. Starting in 2013, contributions to health flexible spending arrangements would be limited to $2,500.

Also starting in 2011, a 5.4% tax surcharge would be imposed on individuals with modified adjusted gross income in excess of $500,000 ($1 million for married filing jointly. No credits would be allowed against this tax and the surcharge would not be taken into account in computing alternative minimum tax liability.

Beginning in 2012, businesses would be required to file information returns for all payments in excess of $600 in a calendar year whether the recipients are individuals or business entities.

Overhaul of California Tax System Is On The Way

On September 29, 2009, the Commission on the 21st Century Economy appointed by Governor Schwarzenegger to re-examine and revamp California’s revenue collection system to withstand the volatility of budget cycles, released its final report and recommendations. The Commission has recommended several significant changes to California’s tax system with a five-year phase-in plan beginning in 2012. Here are a few highlights of the Commission’s proposal:

• Retain progressive tax nature but reduce personal income tax rate for every taxpayer. The new tax rate would be 2.75 percent for taxable income up to $56,000 for joint filers ($28,000 for single) and 6.5 percent for taxable income above that amount.
• Eliminate the existing corporation tax, which is currently at 8.84%, and minimum franchise tax of $800.
• Eliminate the current 5 % state general purpose sales tax over a 5-year period, with the exception of the sales tax on gas and diesel fuels.
• Institute a business net receipts tax not to exceed 4%, applied to the net receipts of businesses. Small businesses with less than $500,000 in gross annual receipts would be exempt from this tax. This tax would have a much broader base than the sales tax (since it would apply not only to goods but also to services and to sales into the state from businesses located outside the state) and, unlike the sales tax, be deductible against federal taxes.
• Establish new Rainy Day Reserve Fund by raising the target for the reserve from 5% of revenues to 12.5% and restrict the government’s ability to use reserve assets so that the reserve is available to help fund services during recessionary periods.

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This entry was posted on Wednesday, November 25th, 2009 at 9:30 am and is filed under Tax Planning. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.