Through many of my conversations with CFOs, controllers and owners of mid-market and smaller companies, I’ve noticed a running theme that more emphasis should be placed on the tremendous opportunities afforded by the Hiring Incentives to Restore Employment (HIRE) Act (see this March 2010 MFA Perspectives for more detail on the HIRE Act). While most are vaguely aware that the Act was signed into law back in March of this year, there is less understanding of the tangible tax benefits this Act offers for private sector employers – for profit and nonprofit organizations – as well as state colleges and universities.

As companies once again look to expand their workforce, the HIRE Act tax incentives provide a boost of urgency for businesses to hire new workers. The payroll tax exemption puts money into a company’s cash flow immediately, since the tax is simply not collected in the first place. Also worth mentioning is that the threshold to qualify for the full new hire retention tax credit is relatively low – $16,129 in wages will be required to earn the full $1,000 credit ($16,129 x 6.2 percent = $1,000).

Below is an outline of the new hiring and retention incentives, including important qualification criteria and details on how to claim the tax benefits. Execution, or a company’s ability to quickly recruit and hire, will be key to taking maximum advantage of these incentives. Hiring qualifying workers sooner rather than later will draw the most out of the Act, as the tax credits diminish over time and disappear completely by January 1, 2011.

Details of the New Tax Benefits

Payroll Tax Exemption

Gives a qualified employer an exemption from paying the employer share of Social Security employment taxes (6.2 percent of the first $106,800 of wages) for wages paid in 2010. (more…)

On May 20, 2010, the Senate approved an extensive financial regulatory bill, while a similar bill had passed the House back in December. The bills must now be reconciled and approved by the full Congress, a process which is expected to take several weeks. Overall, the bills are broadly similar, with some important differences nonetheless. Once a single piece of legislation is crafted and agreed upon, it will be sent to the President for final approval.

The general goal of the pending legislation is to prevent a situation similar to the 2008 crisis from recurring, and to instead ensure responsibility and accountability. Authors of the legislation believe that this would be accomplished by reshaping the roles of several federal agencies and greatly augmenting the powers of the Federal Reserve so that future debacles could be pro-actively predicted and contained. The concern is that various loopholes, dependencies and watered down terms will weaken the impact of the legislation once it is finally passed. Simply put, will it have enough teeth to do the job?

For example, to address the perceived weak regulation of banks and other financial firms, the legislation would eliminate the Office of Thrift Supervision as regulator, and it would tighten oversight of large financial institutions viewed as potential threats to the system through establishment of an Office of National Insurance. A potential shortfall with this proposal is that smaller banks could still select their own regulator, which would likely be the one with the most lenient oversight.

Regarding the “too-big-to-fail” institutions (such as Lehman Brothers of the past), the government had infused billions of dollars into the largest banks to try to keep them afloat. The legislation would enable regulators to close banks whose collapse might threaten the system. The Senate bill allows regulators to decide whether to protect failed banks’ creditors. If creditors feel that they have nothing to lose in continuing to lend to weak banks, they could exacerbate the problem through over-aggressive lending and augment the costs of eventually having to shut them down. In addition, the legislation does very little to preclude big banks from growing even larger, since an amendment to the bill to limit bank size was rejected as a result of bank lobbying. As a result, the taxpayers could end up needing to foot the bill for failure again in the future.

Other hot button issues that are addressed in the financial regulatory bill include (also, see this breakdown from the Senate Committee on Banking, Housing, and Urban Affairs).

- Subjecting more “exotic” instruments such as derivatives to regulations by requiring that trading take place on stock exchanges. The bill does, however, exempt companies that use derivatives to reduce the risk of fluctuations in interest rates and commodity prices. This could serve as a loophole for companies to exploit, by combining traditional business activities with purely financial investment through using derivatives.

- In order to stem risky lending to homeowners, the legislation would create a new consumer protection agency to monitor banking products and ban risky ones. However, the legislation would confine the consumer watchdog’s authority to firms with at least $10 billion in assets, leaving thousands of community banks and non-banks unsupervised.

- As far as credit rating agencies, many gave safe ratings to high-risk mortgage investments that later tanked. To try to address this weakness, the Senate bill would require an independent board, appointed by regulators, to choose rating firms, and would end the banks’ ability to select those agencies themselves. The issue is that the large ratings firms would still end up being paid by banks whose products they rate, which could influence the resulting ratings. Also, since regulators missed the warning signs leading up to the original crisis, why should we give them the keys to choose which agencies rate which financial products?

The bottom line is that even though this monumental legislation is expected to be finally completed and signed by the President very soon (possibly July 4^th), it appears that the grandiose new financial rules might not be more than a paper tiger with too many loopholes to prevent another financial crisis – all bark, but no actual bite. We shall see…

When tax revenues plummeted during the Great Depression, Congress needed a new source of revenue to avoid huge deficits. Partially because it would give them something new to tax, Prohibition was ended and a new excise tax on alcohol helped shore up the sagging budgets on the state and federal levels.

Today, as we climb out of the “Great Recession,” the government is falling behind again. In April the Treasury Department posted an $83 billion deficit, nearly four times larger than April 2009’s and the largest ever for that month. It was also the 19^th consecutive deficit posted, and Uncle Sam is looking for a way to stop that losing streak.

To address the situation, the Obama administration has proposed several changes to the tax code as part of the 2011 budget. Some of these proposed changes directly impact estate and gift tax planning. If the proposals get the approbation of the Congress, they could affect the estate/gift plans of many. If (or until) these tax law changes are approved, readers still have an opportunity to take advantage of some “once-in-a-generation” chances to save money.

Of the proposed estate and gift tax law changes, there are three categories that could have a profound impact on property transfers. The three categories included in President Obama’s proposal include tax basis consistency, valuation discounts, and grantor retained annuity trusts.

- Grantor retained annuity trusts (GRATs) are annuities that have long been popular as a means to transfer large sums of money to a family member tax free. They will remain an option under the president’s proposal, but the minimum term before the beneficiary can receive the corpus will be extended significantly to 10 years. The longer term may make it less likely that the growth benchmark needed for the GRAT (to be an effective wealth transfer vehicle) will be met. Extending the term also makes it more possible that the person establishing the trust could die before the maturity period of the GRAT has been reached.

- The second proposal targets certain restrictions on family controlled entities which might lower the value of a business. If approved, some restrictions (discounts, i.e. lack of control, lack of marketability) will be disregarded for the purposes of valuation assessment in case an ownership stake is transferred by gift or bequest to a family member. If valuation discounts are restricted, transfers of “ownership interest in business entities” will retain their full fair market value. Obviously, the higher the fair market value, the greater the tax paid upon transfer.

- Tax basis, the purchase price of property plus improvements and less depreciation, is used to determine the amount of gain or loss once the property is sold, gifted, or bequeathed. Obama’s proposal seeks to stifle those who would skirt the estate tax by requiring executors of wills to provide both the recipient and the IRS with information on the tax basis of the property inherited.

It’s important to stress that, for now, these are only proposals. Some of these proposals might be enacted as originally drafted, some might be modified as a result of congressional debate, and some might be completely rejected. Nonetheless, it is wise to be familiar with what is currently on the President’s “wish list.”

However, the uncertainty that surrounds them, combined with the certainty of other changes in tax law – next year’s jump in the capital gains tax, for example – means it is more important than ever to have a solid financial and estate plan in place.