Barbara’s Blog

New laws have changed the COBRA rules with respect to federal subsidies for certain workers. Understand your employer obligations under the new laws if you have layoffs.

COBRA in general
Federal COBRA requires employers with 20 or more workers in the prior year that maintain health plans to offer continuation coverage for those who leave the job, voluntarily or involuntarily. Many states have their own “mini” COBRA laws covering companies with as few as two employees.

The American Recovery and Reinvestment Act of 2009 originally provided that workers involuntarily terminated on or after September 1, 2008, and before January 1, 2010, would have 65% of their COBRA premiums paid by the federal government for up to nine months. The Department of Defense Appropriations Act, 2010, extended eligibility to those terminated before March 1, 2010, with the subsidy running for 15 months. The federal subsidy reduces the average monthly cost of COBRA coverage for a terminated employee with a family policy from a national average of $1,111 to $389.

Employers don’t pay for the subsidy; the federal government does. However, as a practical matter, employers lay out the premiums and recoup them through a reduction in employment taxes paid to the federal government.

Temporary Extension Act of 2010
A new law signed on March 2, 2010, extends the eligibility date from February 28, 2010, to March 31, 2010 (i.e., those laid off in March are eligible for the federal subsidy). Eligibility includes those who experienced a reduction in hours of employment anytime on or after September 1, 2008, followed by an involuntary termination between March 2, 2010, and March 31, 2010. Anyone who experienced the reduction in hours during this period but failed to elect COBRA and is terminated within this window in March can now make a COBRA election.

Alert: A jobs bill moving through Congress now would extend eligibility for the subsidy through the end of 2010. If the bill does not become law before the end of March, expect to see another temporary extension of the COBRA subsidy.

Employer action
Be sure to revise notices that must be given to terminated employees about the federal subsidy. Find a sample notice from the Department of Labor.

If you’ve been forced by economic conditions during the past two years to lay off workers and have given them various types of severance benefits, you probably paid Social Security and Medicare taxes (FICA) on those benefits. Now a federal district court has opened the possibility of refunds for prior FICA payments on certain payments to terminated workers. 

The problem
FICA—both the employee share and employer share—is owed on payments that constitute “wages.” The definition of the term “wages” is the crux of the problem. During the recent Great Recession, many employers offered terminated workers various types of payments, including severance benefits, downsizing payments, and supplemental unemployment compensation (referred to as SUB-pay). The tax law specifically allows SUB-pay to be structured in such a way as to avoid the “wages” label and, thus, become exempt from FICA.

New development
A recent court decision has extended the SUB-pay exemption from FICA to traditional severance benefits. In Quality Stores, Inc., the court said severance benefits could be treated the same as supplemental unemployment compensation and would not be treated as wages if three conditions are met:

1. There is an employer plan under which payments are made;
2. Workers are involuntarily terminated (temporarily or on a permanent basis); and
3. There is a reduction in the work force, plant closing, or other similar condition that triggers the terminations.

What employers should do now
Companies that have laid off workers in the past several years and paid FICA on severance benefits should meet immediately with their tax advisors to discuss the next step.

Some things to do:

• Determine whether you have a “plan” within the meaning of the law. If you do not have one yet, consider structuring one for any future layoffs. It may pay to work with a benefits expert for this purpose; the FICA tax savings from a properly-structured plan could be substantial if this court decision holds up.
• Look for an appeal of the recent decision. This could take a year or more.
• Consider filing a “protective refund claim” now for FICA that has already been paid. The deadline for employees who were involuntarily terminated in 2006 is April 15, 2010. (It’s too late to claim a refund for FICA paid in years prior to 2006 because of the three-year statute of limitations.) Refund claims are made by filing Form 941X for each quarter in which FICA was paid on such severance payments. The employer can file for the employer share alone, or for the employer and employee share (provided the employee’s share is disbursed to the former employees).

Self reliance, one of the touchstones of small business owners, is reflected in the second annual Make a Referral Week. It runs from March 8 through March 12 and the goal for the week is to generate 1000 referred leads to 1000 deserving small businesses. The simple action of making a referral can turn into thousands or even millions of dollars for a business, create jobs, and help improve the economy. The Refer-a-Meter will monitor the number of referrals made.

There are also daily educational programs and a seminar on March 10 at 1 pm ET that you can participate in for free. Learn from Ivan Misner, founder of BNI, Bob Burg, author of Endless Referrals, and Ben McConnell, co-author of Creating Customer Evangelists. Register here.

To be part of the referral loop, just enter your name and email. This will enable you to receive updates and highlights throughout the week.

Don’t be seduced by return preparers who claim they know how to get you fat refunds that other preparers won’t. The IRS is cracking down on unscrupulous and incompetent return preparers, and this could lead to an audit for you if your preparer comes under investigation.

Higher return preparer standards
The IRS is launching a program to get unenrolled tax preparers (those who are not attorneys, CPAs, or enrolled agents) to become registered and complete continuing education. Unenrolled preparers will need to obtain a preparer ID number from the IRS and pay a fee to sign up.

This registration won’t begin until after the summer, but the IRS has already begun to identify preparers of all types who have filed a lot of returns showing incorrect deductions and credits. Of the 10,000 letters that the IRS has already sent to this group of preparers, many arise from mistakes related to income and expenses reported on Schedule C, the form filed by sole proprietors and, in many cases, one-member limited liability companies. While the IRS has not said that the crackdown on preparers will result in more audits on their clients, it would not be unreasonable to think that the returns they’ve prepared will come under greater scrutiny.

Which preparer to use
To make sure your return reflects all the write-offs you’re entitled to but no dubious entries, work only with a tax preparer who will not expose you to unwarranted audits. It is not easy to find out whether a preparer is under investigation; only examples of abusive return preparer investigations are listed. 

The following are IRS suggestions for selecting a preparer:

1. Be cautious of tax preparers who claim they can obtain larger refunds than other preparers.
2. Avoid preparers who base their fee on a percentage of the refund.
3. Use a reputable tax professional who signs the tax return and provides you with a copy.
4. Consider whether the individual or firm will be around to answer questions about the preparation of the tax return months, or even years, after the return has been filed.
5. Check the person’s credentials. Only attorneys, certified public accountants (CPAs) and enrolled agents can represent taxpayers before the IRS in all matters, including audits, collection and appeals. Other return preparers may only represent taxpayers for audits of returns they actually prepared.
6. Find out if the preparer is affiliated with a professional organization that provides its members with continuing education and resources and holds them to a code of ethics.

If you’re in the market for a new car, truck, or van for your business, should you buy or lease it? There is no easy answer for this common question. New tax rules can affect your decision.

Buying
If you buy a vehicle, you can depreciate the cost, as well as deduct other expenses associated with owning a vehicle (insurance, gasoline, etc.). However, the tax law puts a cap on the annual depreciation limits, and the IRS has released figures for vehicles placed in service in 2010. The dollar limit for a passenger vehicle placed in service in 2010 and used entirely for business is $3,060. The limit for 2009 had been $10,960 for a vehicle eligible for bonus depreciation (i.e., a new vehicle); the limit for a pre-owned vehicle was $2,960. Next year, the depreciation limit for this vehicle is $4,900, the year after it is $2,950, and for each subsequent year it is $1,775. Limits are prorated if the vehicle is used partly for personal driving.

Slightly higher limits apply to trucks and vans placed in service in 2010. For this year, the limit is $3,160; it’s $5,100 next year, $3,050 the year after, and $1,875 each year thereafter. Again, limits are prorated if the vehicle is used partly for personal driving.

Those purchasing a heavy SUV (more than 6,000 pounds) can expense the purchase price up to $25,000 and then claim regular depreciation on the balance (subject to the dollar limit above).

For vehicles that are not suitable for personal use, such as a van outfitted with shelving and only a jump seat, there is no dollar limit. The full purchase price can be depreciated without any cap.

Leasing
If you lease a vehicle in 2010 that has a sticker price of more than $16,700, you can deduct the lease payments and other expenses for operating the vehicle, but you will have to include a dollar amount in income (called an inclusion amount). This is a figure that you take from an IRS table; it is supposed to equate the write-off whether you buy or lease the vehicle. The fact is that the inclusion amount, which is based on the value of the vehicle when it’s placed in service, is very modest. For example, a passenger car valued at $35,000 has an inclusion amount for 2010 of $38.

Decision
Ultimately, the choice to buy or lease a vehicle usually isn’t based on only tax deductions. It also includes:

• Expected driving for the year. If it’s more than 15,000 miles, leasing may be too expensive.

• Choice of vehicle. Leasing is a way to afford to drive a more expensive vehicle than if it had to be purchased.

Decide which vehicle you would like to drive and then determine the financial costs as well as the tax and emotional benefits for buying versus leasing so you can make a fully-informed decision.

Folk singer Richard Farina’s book, “Been Down So Long It Looks Like Up to Me,” are the words that best describe the state of small business today.

According to NFIB’s Small Business Trends February 2010, the Index of Small Business Optimism gained 1.3 points, but optimism about the economy has stalled. Small business was depressed at the start of 2009 and has remained about the same a year later.

The trends show no improvement in job creation, capital spending rose slightly but is historically weak, and the net percent of all owners reporting higher nominal sales in the past three months remained negative.

Translation:  Many are talking about being up because it’s better than facing the fact that they are not making significant improvements in sales or other categories.

What can turn things around?

Washington’s efforts to increase access to capital are nice but not essential to an economic recovery. The NFIB Trends shows that only 5% identified financing as a top problem; 31% cited poor sales as a much bigger concern.

The tax incentives to stimulate job growth that are under consideration in Washington miss the mark. Businesses don’t hire because they are rewarded to do so; they hire because they need the help when business is up.

Business won’t improve until there is a sustained and marked increase in consumer confidence, which will translate into more sales for small business.

The Conference Board’s Consumer Confidence Survey released at the end of January showed some improvement, but we have a long way to go!

There are both tax incentives and take hikes in the proposals, which tend to offset each other and result in zero sum for small businesses. The proposals are outlined in the Treasury Green Book.

Here are some of the proposals that would impact small businesses and their owners. 

Tax incentives

A number of provisions that had applied in 2009 or are set to expire in 2010 would be extended or made permanent, including:

• • First-year expensing up to $250,000 (for 2010, with the ceiling dropped in 2011).
• • 50% bonus depreciation (for 2010).
• • Research credit (make this permanent).
• • Empowerment zone incentives (through 2010).
• • 15-year amortization for certain leasehold improvements (through 2011).
• • New markets credit (for 2010 and 2011).

The proposals would also extend COBRA assistance by the federal government to employees terminated before January 1, 2011, which means more administrative work for employers subject to COBRA and that lay off workers.

The proposals contain a number of new incentives:

• • Doubling of the current $500 per year credit for small employers that start qualified retirement plans. Employers in business for more than two years and with more than 10 employees that do not have qualified plans would be required to adopt an automated payroll contribution system for employee IRA contributions. These breaks wouldn’t start until 2012.
• • Eliminate any capital gain tax on small business stock made after February 17, 2009, that is held for more than five years.
• • Remove cell phones from listed property, simplifying substantiation.

Tax hikes

The tax rates on individuals with income over $200,000 and joint filers with income over $250,000 would be increased, with a reinstatement of pre-Bush tax cut rates of 36% and 39.6%. Who would be subject to these rates, besides top sports figures, movie stars, and financial executives? The answer is many, many small business owners.

• The FUTA surtax of 0.2% of taxable wages, which first was imposed in 1976, would be made permanent.
• A LIFO inventory election would be repealed after 2011, eliminating the opportunity to effectively defer income when inventory costs increase over time.
• Various tax incentives for fossil fuels would be repealed after 2011, including expensing of intangible drilling costs and percentage depletion for coal and other hard mineral fossil fuels.
• The Superfund environmental income tax of 0.12% imposed on corporate alternative minimum taxable income over $2 million would be reinstated; this tax had expired at the end of 1995. This would apply after 2010 and through 2020.
• Information reporting would be required for payments of services to corporations of $600 or more; currently only payments to independent contractors and certain other parties are required to be reported after 2010.
• Information reporting would be required for rental income recipients making payments of $600 or more to a service provider, such as a plumber, painter, or accountant, in the course of earning rental income after 2010.
• A contractor receiving payments of $600 or more in a calendar year from a particular business would be required to furnish to the business on Form W-9 the contractor’s certified taxpayer identification number (TIN). The business would be required to verify the contractor’s TIN with the IRS.
• The IRS would be allowed to require prospective reclassification of workers who are currently misclassified as independent contractors.

What it all means

These are only proposals. It is unlikely that Congress will enact all, or even most, of these suggestions given that 2010 is an election year.

What is troubling about the proposals, however, is the fact that it includes tax hikes, temporary tax extensions, and other measures that impede small businesses and do not support job growth. The minor tax incentives for small businesses are more than offset by tax hikes.

The proposals do not include specific tax incentives for job creation, although there are already a number of bills before Congress in this regard.

Certainly, some of the proposals are welcomed and would be helpful to small businesses.  Bottom line:  We have to wait to see what Congress will do about taxes for 2010 and for the coming years.

This is the big question looming in Washington, on Wall Street, on Main Street, and in neighborhoods throughout the country. Everyone wants job creation; and President Obama said so in his State of the Union Address, but many disagree on how to get this done.

In the past, small businesses (under 500 employees) have been the main job creation engine, responsible for more than 60% of all new jobs. This action has not occurred as we come out of the recession.

Payroll tax cut
Sen. Schumer (D-NY) and Sen. Hatch (R-Utah) have proposed (in an OpEd piece in the New York Times)  a payroll tax cut for any employer who hires a worker who has been unemployed for at least 60 days. The credit would be a waiver of the Social Security portion of FICA (6.2% of wages paid in 2010 up to $106,800). An additional $1,000 credit would apply if the worker remained on the payroll for at least 52 weeks. This proposal has considerable appeal:

There’s an immediate tax benefit to employers—rather than waiting to file an income tax return to claim some job-creation deduction or credit, this payroll tax cut is reflected in a reduction in payroll tax deposits.

• There’s no cap—the more workers hired, the greater the tax savings.
• The incentive grows with quick action—a worker earning $50,000 annually who is hired on February 1 would save about $2,800 in payroll taxes; if the hiring doesn’t take place until July 1, the savings are only $1,550.
• It’s easy to compute—it is 6.5% of wages; there is no cap on who is hired, so it applies to management (up to the Social Security wage base of $106,800) as well as rank-and-file employees.

Other tax incentives
The temporary payroll cut isn’t the only tax incentive job creation. President Obama has indicated support for tax credits for small businesses that hire new workers.  Specific proposals include:

• A tax credit of 15% of payroll increases in 2010 versus 2009 (and a 10% credit for increases in 2011 versus 2010). The credit would apply for adding people to the payroll as well as increasing hours or wages.
• A 20% tax credit for small employers (fewer than 100 employees) for year-over-year payroll increases; a 15% credit would apply to larger employers.

These incentives require considerable calculations and only benefit profitable companies (you need to owe tax in order to use a tax credit to offset the tax).

Bottom line
Tax incentives for job creation may be useful, but are probably not as a strong an incentive as overall economic recovery. Small businesses will start to create jobs when sales increase (consumer confidence must rise and the unemployment rate must fall for this to happen). Still, a payroll tax cut would be a better tax incentive than a deduction or tax credit.

The National Federation of Retailers (NFR) held its annual expo in New York City on January 10-13, 2010. NFR reported holiday sales were a little better than in the prior year, but were certainly not good by any standard.

Customers today are weary of the recession, saddled with debt, and still uncertain about their jobs. Looking ahead, this paints a poor picture of buyers.

Still, there are a number of things you can do to improve customer attraction and retention, and your sales.

1. Do a better job of finding out what your customers want. This will enable you to target your marketing more effectively. How to find out? One way is to track what customers are viewing on your website if you’re willing to invest in the technology. Another is just to ask them. Dominos Pizza for example, has turned customer complaints about their crust, sauce, and cheese into a new product (“inspired pizza”) and a new marketing campaign showing them as people who listen to their customers.
2. Keep up your marketing efforts. Reach out to your customers and prospects through Twitter and other social media venues. Also, do targeted email marketing.
3. Find out what’s working in your industry. What innovations are being used in your industry to attract and retain customers? Check for new items and processes that are now available. Look for low-tech solutions that may be desired by customers, such as longer hours or 24-7 access to a customer representative.
4. Ask for customer reviews. Post testimonials on your site because they work. According to Nielsen’s Global Online Consumer Survey, 90% of consumers online trust recommendations by people they know and 70% trust opinions of unknown users. Alternative: Use a star-rating system such as the one you’ll find on Blue Nile.  

Small business owners who feel overwhelmed by the prospect of doing marketing themselves should consider engaging a professional to help. While this can be costly, it may be a necessary expense for 2010.

The Senate is not scheduled to return from recess until January 19, at which time it and the House will likely address numerous unfinished tax measures.

These include:

• Estate tax—at present there is none because Congress failed to take action before January 1 of this year. Whether a new law can be made retroactive to January 1 for estates of those who die between January 1 and the date of the new law’s enactment remains to be seen; it could take years and a Supreme Court decision to settle the issue.
• Income tax—more than four dozen provisions affecting individuals and businesses expired at the end of 2009 and are awaiting extension. While there is no controversy about many of these provisions—almost all agree they should be extended—Congress just didn’t get around to it. Key concerns include the alternative minimum tax, which will affect about 25 million taxpayers  (many of whom are middle class) in 2010 if nothing is done, the research credit, and incentives for buying equipment and machinery. In the meantime, businesses continue to live with uncertainty about the tax credit, worth about $7 billion annually to them; the credit has been extended 13 times since it was created in 1981.

How can Congress be forced to take the action that is so needed for businesses to plan effectively and move ahead in a tough economy?

• Impeachment isn’t an answer. This remedy, which can remove a public official from office, is only for high crimes and misdemeanors. While it may seem like criminal activity to allow the country to exist in tax limbo, it technically isn’t a crime.
• Mandamus isn’t an answer. This remedy applies only for compelling a public official to do what they are required to do, and enacting tax bills isn’t a requirement.
• Censure isn’t an answer. This process results in a reprimand of Congressional members, usually for unethical behavior. While it can be argued that the situation created by Congress’ inaction on tax matters is unethical, censure on the entire body isn’t an option.

The November 2010 election is 10 months away. At that time, all of the seats in the House and one-third of the Senate seats are up for election. Electing people who will do what is necessary and appropriate to keep business moving and end the uncertainty that exists today is the only answer. 

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