Senate jobs bill includes employer tax incentives, new reporting and withholding requirements for offshore accounts

Senate Majority Leader Harry Reid, D-Nev., unveiled a scaled-down jobs creation package late February 11 that includes tax incentives for employers who hire displaced workers and an extension of the increased small-business expensing limits under section 179. The Hiring Incentives to Restore Employment (HIRE) Act would be paid for in part through provisions to curb offshore tax evasion and delay the effective date of the worldwide interest allocation election.

Reid has indicated that the Senate will vote on the bill sometime after the week-long Presidents Day recess which begins on February 15.

The bill does not provide for extensions of expired business and individual tax incentives that were part of draft jobs legislation released earlier in the day by Senate Finance Committee Chairman Max Baucus, D-Mont., and ranking Republican Charles Grassley of Iowa, nor does it include revenue offsets from the Baucus-Grassley draft that would codify the economic substance doctrine and exclude “black liquor” from eligibility for certain renewable energy credits.

“No one can dispute we have a jobs bill,” Reid said in remarks to reporters about the revised legislation. “We’re not going to confuse this with tax extenders.”

Reid indicated that the Senate would take up extenders legislation separately after the recess.

Employment tax incentives

The HIRE Act includes two significant incentives for hiring and retaining workers. First, it would exempt from payroll tax those wages paid by employers (not including federal, state, or local government employers) beginning after the date of enactment and ending on December 31, 2010. This incentive would be available to employers hiring individuals who:

• Begin employment after February 3, 2010, and before January 1, 2011;
• Are employed for no more than 40 hours during the two months prior to the new employment; and
• Were not employed to replace another employee for reasons other than voluntary or for-cause termination.

Second, the bill would increase for employers the current-year business credit under section 38(b) by $1,000 for each worker who was employed on any date during the taxable year for at least 52 consecutive weeks, and whose wages during the last 26 weeks equaled at least 80 percent of wages for the first 26 weeks of the period.

Other business incentives

The bill also includes provisions that would:

• Extend through 2010 the increased section 179 expensing limit of $250,000 and investment phase-out of $800,000 originally enacted in the Economic Stimulus Act of 2008 and
• Allow qualifying issuers of tax credit bonds the option to utilize the direct-subsidy Build America Bond structure for bonds issued after the date of enactment.

Foreign account compliance

On the revenue side, the HIRE Act incorporates a number of provisions intended to curb offshore tax evasion that were approved as part of House extenders legislation in December. (These provisions, which would raise an estimated $9 billion over 10 years, are based on the Foreign Account Tax Compliance Act introduced last October by Baucus and House Ways and Means Committee Chairman Charles Rangel, D-N.Y.)

Reporting certain foreign accounts – The bill would add several new code sections devoted to the enforcement of information reporting. The new sections would impose 30 percent withholding on income from U.S. financial accounts or assets held by a foreign financial institution unless that institution enters into and complies with an agreement with Treasury to report U.S. account/asset holders and other related account information.

The agreement would require the financial institution to request waivers (from account holders) of any applicable foreign secrecy law and to close any account for which the holder refuses to provide such a waiver. Reporting would not be required for account holders that are public corporations, tax-exempt organizations, banks, real estate investment trusts, or regulated investment companies.

Similar withholding requirements would apply to nonfinancial foreign entities, such as corporations or trusts.

Withholding would not be required for income connected with U.S. business and taken into account under sections 871(b)(1) or 882(a)(1).

These provisions would be effective for payments made after December 31, 2012.

Individual reporting requirement – Under a new section 6038D, an individual holding an interest in a foreign financial asset in any taxable year would be required to attach a disclosure statement to his or her tax return for that year if the aggregate value of all such assets exceeds $50,000. Applicable assets would include financial accounts, foreign stock and securities, and other financial instruments and contracts.

Failure to disclose for any taxable year would subject the individual to a $10,000 penalty. If the individual were to continue such failure after notification by the Secretary, an additional $10,000 penalty would apply for each 30-day period following the 90-day period after the Secretary mails the notice. The “continuation” penalty would not exceed $50,000. The bill would provide a penalty exception for reasonable cause.

Any entity “formed or availed of for purposes of holding” such assets would be treated as if the entity were an individual.

These requirements would be effective for taxable years beginning after the date of enactment.

Penalties – The bill would amend section 6662 to make the underpayment penalty applicable to understatements attributable to undisclosed foreign financial assets. For such understatements, the penalty imposed by section 6662 would be 40 percent, rather than 20 percent. The bill also would extend the statute of limitations on assessments to six years for significant omissions of income.

No disclosure requirement for material advisors – In a change from the original Rangel-Baucus proposal, the bill would not require reporting of material assistance or advice with respect to the acquisition of an interest in a foreign entity.

PFICs and trusts – The bill would require any person who is a shareholder of a passive foreign investment company (PFIC) to file an annual return, regardless of whether the shareholder has gain from the sale of PFIC stock.

Section 679 would be amended to provide that a trust would be treated as having a U.S. beneficiary even if the U.S. person’s interest is contingent. A trust would also be treated as having a U.S. beneficiary if any person has the discretion to determine beneficiaries, unless the trust identifies the class of persons to whom distributions may be made and none of those persons are U.S. persons. If a U.S. person transfers property to a foreign trust, there would be a presumption that a foreign trust has a U.S. beneficiary unless the person discloses all required information and satisfies other requirements of section 679.

The penalty under section 6677 for failure to report foreign trusts would also be amended to impose a minimum $10,000 penalty for failing to file the required information return.

Dividend equivalent payments – In addition, the legislation would define dividends to include substitute dividends, dividend equivalent payments made pursuant to specified notional principal contracts, and similar payments, and would require withholding. This provision would be effective 180 days after enactment.

Other revenue offsets

The Hire Act would delay the effective date of the worldwide interest allocation election through 2019. Under current law the election would be available after December 31, 2017.

The bill also would raise revenue through a variety of provisions affecting the Highway Trust Fund.

— Joel Deuth
     Tax Policy Group
     Deloitte Tax LLP