Business Provisions of The American Recovery and Reinvestment Act of 2009

First, a little backwards thinking. I know you’ve heard a lot about how tax cuts stimulate spending. I suspect you’ve heard little or nothing about how taxes, in and of themselves, encourage businesses to spend money. For example, a sole proprietor in the 25% tax bracket, in a high income state like California can expect an approximate 50% discount, via the tax deduction, for anything they spend on qualified business expenses. Yes, the expenses have to be reasonable or necessary, but knowing that you will get almost half of it back at tax time (or sooner, if you adjust your estimated tax payments), can make a new computer (or a new employee) much more appealing (and doable).

Speaking of estimated taxes:
Individuals with an adjusted gross income under $500,000, who can certify that at least 50% of their income reported the previous year was from a small business are now required to pay estimated tax payments based on 90% of the previous years taxes (rather than 100%). As always, if your 2009 taxable income is looking lower than 2008, you can still base your estimated taxes on your projected 2009 taxes instead of your 2008 actual taxes.

Speaking of new employees:
Disabled veterans and “disconnected youth” have been added to the classes of employees that may qualify their employers for the Work Opportunity Tax Credit.

Speaking of new computers (or other tangible assets):
Generally, the expense of fixed assets (assets expected to have a life of one year or more), is claimed over the lifetime of the asset via depreciation, rather than in the year they are purchased and/or put into service. The 2008 Economic Stimulus Act brought back bonus depreciation, allowing businesses to deduct 50% of the cost of new assets in the year of purchase, and then deduct the balance via depreciation over the first and remaining years of the assets expected life.

The 2009 Act extends bonus depreciation through 2010. The act also increased the amount that can be expensed (claimed) in the year of purchase under section 179, and the amount of depreciation that can be claimed for vehicles was also increased. The act also extended the opportunity for qualifying businesses can also take accumulated AMT and business credits in lieu of bonus depreciation through 2010.

And yes, there’s more. The 2009 act also has provisions that allow qualifying business to:
Recognizing cancellation of debt over 5 years
Carry net operating losses back 5 years
Shorten the S-corp built-in gain period

And more – as always, contact us if you have questions about how any provision of this act will affect your tax situation.

Other Independent Contractor Reporting Requirements

I mentioned in the 1099 posting that "if you are based in California and have a 1099-MISC reporting requirement, you were probably also required to submit a DE-542 within 20 days of paying over $600 or entering into a contract to pay over $600." Apparently that was a surprise to some, so I thought I’d talk a little more about new hire reporting as it affects independent contractors. If you are based in California, you may also want to see the information about California’s nonresident withholding requirements below.

History: Since 1997, the Personal Responsibility and Work Opportunity Reconciliation Act has required all employers covered under unemployment insurance law to report new hires to their state’s new hire registry within 20 days. While the goal of the requirement was to collect delinquent child support payments more effectively, states can also use the information to catch fraudulent unemployment, worker’s compensation and welfare claims. States have the option of imposing penalties up to $25 for failing to report new hires, and $500 if the failure is due to a conspiracy between the new hire and the reporting employer.

The above sets minimum requirements for the states new hire reporting. States can require that more reporting or impose shorter deadlines – you’ll notice on the chart that some states require reporting within as little as 7 days. Multistate employers can choose to report all of their new hires to one of the states in which they do business, but will be subject to that state’s reporting requirements – e.g. you probably wouldn’t choose Alabama with it's 7 day deadline :-).

Today: California isn’t the only state to require reporting of independent contractors as well as employees - you can see a list of states requiring independent contractor reporting here.

NOTE: Many folks have tried to save payroll taxes by treating their employees as independent contractors. Having the IRS or state employment agency decide after the fact that independent contractors were actually employees can be an expensive mistake, possibly costing not only back taxes, but penalties and interest as well as employee benefits like retirement or profit sharing.

The IRS looks at the degree of control and independence the contractor has – contrary to some of the bad advice my clients have received (before they were my clients), merely calling them contractors (or having them sign statements that they understand they are contractors) while treating them as employees won’t stand up under examination. Unfortunately, there is no single “bright line” test that separates contractors from employees. If you are not certain how to treat a service provider, you can use IRS form SS-8 to request a determination – be advised that it will take them about six months to get back to you. You may also want to check with your tax preparer, the IRS or your state employment department for more information (and your state may also offer advanced determination form - California has form DE-38).

California Offers Incentives to Encourage Nonresident Withholding

Since January 1, 2008 California payers are required to withhold 7% on payments of “non-wage” compensation to non-residents exceeding $1,500 per calendar year, and remit the amounts withheld quarterly.

Through March 15, 2009, California will consider waiving penalties for failure to file correct information returns if the delinquent returns are prepared and all interest is paid. Payers can remit past-due 2008 withholding as additional compensation to the nonresident. The Franchise Tax Board will also agree not to audit 2007 tax year and prior withholding to program participants.

What Types of Income are Subject to California Withholding?

Payments of over $1,500 annually for:

• Services provided in California by independent contractors
• Rents, Royalties
• Estate and Trust Distributions

Even though no withholding is required of California residents (including entities qualified with the CA Secretary of State to do business in California), payers of California source income should get a completed FTB form 590 “Withholding Exemption Certificate” from the payee.

7% Withholding is required for payments over $1,500 to nonresidents (including entities not qualified with the California Secretary of State to do business in California).

• Payees who are current on California taxes or meet other criteria can submit FTB form 588 “Nonresident Withholding Waiver Request” to request an exemption from withholding.


• Payees can also file FTB form 589 “Nonresident Reduced Withholding Request” to request reduced withholding based on their California income and expenses.

Forms 588 and 589 are due at least 10 days before payment is made.

Amounts withheld are due quarterly –generally on the 15th day of the month after the end of the quarter. More information is available at www.ftb.ca.gov/individuals/wsc/withholding.shtml

1099s - Due to Recipient February 2, 2009

Most of you who run small businesses know about 1099s. 1099s (specifically 1099-MISC) are issued for a variety of reasons, the best known being to report payments of over $600 to independent contractors for services, which is how I ended up spending a lot of time on the phone with the IRS -- the instructions are not clear for payments like software subscriptions that seem, to me, to fall somewhere between goods and services.

After repeated conversations with the IRS, it appears that whether or not software is customized for you determines whether it is a good or reportable service. (for example, Quickbooks is a good, a third party application that was written or modified *for you* to allow you to import transactions into Quickbooks is a service). In the same conversation, the IRS maintained that hosting and internet access are reportable services.

Here's more information on specific 1099-MISC reporting requirements. Need help? Mention this post to have up to 5 1099-MISCs prepared for only $25.

Disclaimer: These are the rules as I understand them. The IRS will probably agree, but since I don’t control them, I make no claim that they will in all cases.

You can view the IRS’s instructions at www.irs.gov/pub/irs-pdf/i1099msc.pdf. Please note that payments not reportable on form 1099-MISC may be reportable on other 1099 forms(for example, cancelled debt is reported on form 1099-C, or interest to investors reported on 1099-INT).

Also:

• Reporting is required only for payments made in the course of your trade or business (non-profit organizations a generally considered a business for this purpose).


• You generally don’t have to report payments to a corporation (unless they are business-related payments for medical or legal services, fish proceeds, or payments in lieu of dividends) or a tax-exempt organizations (including government entities).


• Payments for merchandise, telegrams, telephone, freight, storage and anything that meets the IRS’s definition of a “similar items” are also excluded.


• If you are based in California and have a 1099-MISC reporting requirement, you were probably also required to submit a DE-542 within 20 days of paying over $600 or entering into a contract to pay over $600. See http://www.edd.ca.gov/pdf_pub_ctr/de542.pdf