Small Businesses Get Paid to Hire New Employees

As I write this, Congress is debating an extension of the payroll tax cut. Last I heard, Congress will extend the tax break for two months instead of for the entire year. The tax break will not encourage employers to hire more, but the extra money in people's pockets should help the economy, hence encourage employers to hire people to get the extra work done.

Small business owners are not left out. Several tax breaks exist to help defray the cost of hiring new employees and retain them. Credits are also available on health insurance premiums, pension plan start-up costs, Indian employment, and employer provided daycare. These and other credits are good discussion points with your accountant. If your accountant doesn't bring up these issues, ask. One credit, employer paid FICA on tips, is 100%.

Golf Cart Tax Credit

This should make golfers smile. Street-legal electric golf carts qualify for a federal income tax credit. The credit has a base rate of $2,500. This is an actual cash reduction in your federal income tax, rather than a deduction. Depending on the battery capacity, the credit can be larger, in some cases, as much as half the cost of the vehicle.

The golf cart manufacturers understand the tax credit and are building golf carts that meet the tax standard. The golf cart can still be used on a golf course, but qualifies for the credit because they are manufactured for highway use primarily.

Getting Smart with Education Credits

The education credits have a new friend, the American Opportunity Credit. Let’s review the old and new education credits.

The Hope credit has been replaced by the American Opportunity credit, but is still available in the Midwest Disaster Area where the credit is double the regular credit. There are several notable differences between the Hope and American Opportunity credit: maximum credit, phase-out, eligibility, qualifying costs, and refundability. Review the list below:

• Maximum credit: American Opportunity credit (AOC): $2,500 (100% of first $2,000 plus 25% of next $2,000)per student; Hope credit (Midwest Disaster Area only): $3,600 (100% of the first $2,400 plus 50% of the next $2,400) per student; Lifetime Learning Credit (LLC): $2,000 (20% up to $10,000) per return.
• 2009 modified adjusted gross income phase out range: AOC: $80,000-$90,000 ($160,000-$180,000 MFJ); Hope and LLC: $50,000-$60,000 ($100,000-$120,000 MFJ)
• Eligibility: AOC: enrolled at least half-time for first 4 years; Hope: Enrolled at least half-time for first 2 years; LLC: Enrolled in any qualifying course.
• Refundable: AOC: 40%, max: $1,000; Hope and LLC: No.
• Qualifying Costs: AOC: Tuition, required fees, and course materials; Hope: Tuition, required fees, books, supplies, equipment, plus room and board if at least half-time; LLC: Tuition and required fees only (Midwest Disaster Area includes more).

For most people, the phase out will determine which credit to apply. As always, check with your friendly accountant for your personal tax situation.

First-Time Homebuyer Credit Running Short

If you have plans to buy your first home, you better hurry. The first-time homebuyer credit expires November 30, 2009. There is no plan to extend the credit at this time.

The $8,000 credit is refundable, meaning, if your taxes are under $8,000, the excess will be paid to you. You can amend your 2008 tax return to claim the credit immediately.

The old credit for 2008, capped at $7,500 was no more than an interest-free loan. Those credits must be paid back in 15 equal installments starting with the 2010 tax return.

For 2009, the credit expanded to $8,000 and doesn't get paid back. The home must remain your primary residence for three years or the credit is forfeited.

You must close on the home prior to filing an amended return for the credit. Use form 5405. The IRS is slow sending checks for this credit due to the volume received and for fraud prevention. The credit has turned into a fraud problem for IRS, so they are reviewing all claims for the credit.

Follow-up note: After I wrote this post I read that there is an effort in Congress to extend the credit. Stay tuned; I'll fill you in if it is extended.

Energy Tax Credit Review

I received several questions on the energy credit this week and now is a good time to review this as the we head into winter.

The tax credits are available at 30% of the cost, up to $1500 for: windows, doors, insulation, roofs, HVAC, non-solar water heaters, and biomass stoves. The credit is available for tax years 2009 and 2010 and applies to existing homes only.

Tax credits for 30% of cost to tax year 2016 with no upper limit applies for: geothermal heat pumps, solar panels, solar water heaters, small wind systems, and fuel cells. These credit are for new and existing homes.

The questions this week focused on the amount of credit for those in lower income brackets. The energy credits are non-refundable, meaning you must have a income tax liability to deduct them. A good starting point is last year's tax return. Review your tax liability with your tax professional and make sure you benefit if taking the credit.