http://www.virginiabusiness.com/index.php/opinion/article/use-of-land-preservation-tax-credits-requires-some-strategy/312856/

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Tax breaks and incentives
Enhanced small business expensing (Section 179 expensing). In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers can elect to write off the cost of these expenses in the year of acquisition in lieu of recovering these costs over time through depreciation. Under pre-2010 Small Business Jobs Act law, taxpayers could expense up to $250,000 of qualifying property-generally, machinery, equipment and certain software-placed in service in tax years beginning in 2010. This annual expensing limit was reduced (but not below zero) by the amount by which the cost of qualifying property placed in service in tax years beginning in 2010 exceeded $800,000 (the investment ceiling). Under the new law, for tax years beginning in 2010 and 2011, the $250,000 limit is increased to $500,000 and the investment ceiling to $2,000,000.
The new law also makes certain real property eligible for expensing. For property placed in service in any tax year beginning in 2010 or 2011, the up-to-$500,000 of property expensed can include up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property).
100% exclusion of gain from the sale of small business stock for qualifying stock acquired after date of enactment and before Jan. 1, 2011. Before the 2009 Recovery Act, individuals could exclude 50% of their gain on the sale of qualified small business stock (QSBS) held for at least five years (60% for certain empowerment zone businesses). To qualify, QSBS must meet a number of conditions (e.g., it must be stock of a corporation that has gross assets that don’t exceed $50 million, and the corporation must meet active business requirements). Under the 2009 Recovery Act, the percentage exclusion for gain on QSBS sold by an individual was increased to 75% for stock acquired after Feb. 17, 2009 and before Jan. 1, 2011. Under the new law, the amount of the exclusion is temporarily increased yet again, to 100% of the gain from the sale of qualifying small business stock that is acquired in 2010 after date of enactment and held for more than five years. In addition, the new law eliminates the alternative minimum tax (AMT) preference item attributable for that sale.
General business credits of eligible small businesses for 2010 allowed to be carried back five years. Generally, a business’s unused general business credits can be carried back to offset taxes paid in the previous year, and the remaining amount can be carried forward for 20 years to offset future tax liabilities. Under the new law, for the first tax year of the taxpayer beginning in 2010, eligible small businesses can carry back unused general business credits for five years. Eligible small businesses consist of sole proprietorships, partnerships and non-publicly traded corporations with $50 million or less in average annual gross receipts for the prior three years.
General business credits of eligible small businesses in 2010 aren’t subject to AMT. Under the AMT, taxpayers can generally only claim allowable general business credits against their regular tax liability, and only to the extent that their regular tax liability exceeds their AMT liability. A few credits, such as the credit for small business employee health insurance expenses, can be used to offset AMT liability. The new law allows eligible small businesses, as defined above, to use all types of general business credits to offset their AMT in tax years beginning in 2010.
S corporation holding period. Generally, a C corporation converting to an S corporation must hold onto any appreciated assets for 10 years following its conversion or face a business-level tax imposed on the built-in gain at the highest corporate rate of 35%. This holding period is reduced where the 7th tax year in the holding period preceded the tax year beginning in 2009 or 2010. The 2010 Small Business Jobs Act temporarily shortens the holding period of assets subject to the built-in gains tax to 5 years if the 5th tax year in the holding period precedes the tax year beginning in 2011.
Extension of 50% bonus first-year depreciation. Businesses are allowed to deduct the cost of capital expenditures over time according to depreciation schedules. In previous legislation, Congress allowed businesses to more rapidly deduct capital expenditures of most new tangible personal property, and certain other new property, placed in service in 2008 or 2009 (2010 for certain property), by permitting the first-year write-off of 50% of the cost. The new law extends the first-year 50% write-off to apply to qualifying property placed in service in 2010 (2011 for certain property).
Special rule for long-term contract accounting. The new law provides that in determining the percentage of completion under the percentage of completion method of accounting, bonus depreciation is not taken into account as a cost. This prevents the bonus depreciation from having the effect of accelerating income.
Boosted deduction for start-up expenditures. The new law allows taxpayers to deduct up to $10,000 in trade or business start-up expenditures for 2010. The amount that a business can deduct is reduced by the amount by which startup expenditures exceed $60,000. Previously, the limit of these deductions was capped at $5,000, subject to a $50,000 phase-out threshold.
Limitation on penalty for failure to disclose certain reportable transactions (including listed transactions) on a return. The new law limits the penalty to 75% of the decrease in tax resulting from the transaction. The minimum penalty is $10,000 for corporations and $5,000 for individuals (for failure to report a listed transaction, the maximum penalty is $200,000 and $100,000, respectively). These changes are retroactively effective to penalties assessed after Dec. 31, 2006.
Deductibility of health insurance for the purpose of calculating self-employment tax. The new law allows business owners to deduct the cost of health insurance incurred in 2010 for themselves and their family members in calculating their 2010 self-employment tax.
Cell phones removed from listed property category. This means that cell phones can be deducted or depreciated like other business property, without onerous recordkeeping requirements.
Offsets (revenue raisers)
Information reporting required for rental property expense payments. For payments made after Dec. 31, 2010, the new law requires persons receiving rental income from real property to file information returns with IRS and service providers reporting payments of $600 or more during the tax year for rental property expenses. Exceptions are provided for individuals renting their principal residences on a temporary basis (including active members of the military), taxpayers whose rental income doesn’t exceed an IRS-determined minimal amount, and those for whom the reporting requirement would create a hardship (under IRS regs).
Increased information return penalties.Effective for information returns required to be filed after Dec. 31, 2010.
Application of continuous levy to tax liabilities of certain federal contractors. For levies issued after date of enactment, the new law allows IRS to issue levies before a collection due process (CDP) hearing on Federal tax liabilities of Federal contractors (taxpayers would have an opportunity for a CDP hearing within a reasonable time after a levy is issued).
Allow participants in governmental 457 plans to treat elective deferrals as Roth contributions. For tax years beginning after Dec. 31, 2010, the new law will allow retirement savings plans sponsored by state and local governments (governmental 457(b) plans) to include designated Roth accounts. Contributions to Roth accounts are made on an after-tax basis, but distributions of both principal and earnings are generally tax-free.
Allow rollovers from elective deferral plans to designated Roth accounts. The new law allows 401(k), 403(b), and governmental 457(b) plans to permit participants to roll their pre-tax account balances into a designated Roth account. The amount of the rollover will be includible in taxable income except to the extent it is the return of after-tax contributions. If the rollover is made in 2010, the participant can elect to pay the tax in 2011 and 2012. Plans will be able to allow these rollovers immediately as of date of enactment.
Crude tall oil (a waste by-product of the paper manufacturing process) is excluded from eligibility for the cellulosic biofuel producer credit.The new law limits eligibility for the tax credit to fuels that are not highly corrosive (i.e., with an acid number of 25 or less), effective for fuels sold or used after Dec. 31, 2009.
Nonqualified annuity contracts. The new law permits holders of nonqualified annuities (annuity contracts held outside of a qualified retirement plan or IRA) to elect to receive part of the contract in the form of a stream of annuity payments, leaving the remainder of the contract to accumulate income on a tax-deferred basis.
Guarantee fees. Amounts received directly or indirectly for guarantees of indebtedness of a U.S. payor issued after date of enactment are sourced, like interest, in the U.S. As a result, amounts paid by U.S. taxpayers to foreign persons will generally be subject to U.S. withholding tax.
Please keep in mind that I’ve described only the highlights of the most important changes in the new law. If you would like more details about any aspect of the new legislation, please do not hesitate to call.
Respectfully yours,
J. Kenneth Timmons, Jr.
Tax Partner

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Contact Information:

For more information about this or other topics of interest please contact your Wells, Coleman accounting professional at:
804-358-1150

QR1: What is the payroll tax exemption?
A-QR1: The payroll tax exemption is an exemption from the employer’s 6.2 percent share of social security tax on all
wages paid to qualified employees from March 19, 2010 (the day after the date of enactment of the HIRE Act) through December 31, 2010. The employee’s 6.2 percent share of social security tax and the employer and employee’s shares of Medicare tax still apply to all wages.
QR2: Which employers qualify for the payroll tax exemption?
A-QR2: Taxable businesses and tax-exempt organizations qualify for the payroll tax exemption. Such employers in
U.S. territories (i.e., American Samoa, Commonwealth of Northern Mariana Islands, Guam, the U.S. Virgin Islands andPuerto Rico) that are subject to federal social security tax also qualify for the payroll tax exemption. Federal, State or local government employers generally do not qualify for the payroll tax exemption. However, public colleges and universities can qualify for the exemption. Indian tribal governments also qualify for the exemption.
QR3: Does the payroll tax exemption apply to household employers?
A-QR3: No. The payroll tax exemption applies only to wages paid to a qualified employee performing services in the
employer’s trade or business or in activities in furtherance of a tax-exempt organization’s exempt purpose.
QR4: If an employer starts a new business, does the payroll tax exemption apply to wages paid to employees hired for the new business?
A-QR4: Yes, if they are qualified employees.
QR5: If an employee laid off in 2009 has been receiving COBRA premium assistance, for which the employer has been taking the COBRA premium assistance credit, and the employer rehires the employee, can the employer take the payroll tax exemption under the HIRE Act for wages paid to the employee?
A-QR5: Yes, if the employee is a qualified employee.
QR6: Can a qualified employer both apply the payroll tax exemption and claim the work opportunity tax credit (WOTC) for the same employee?
A-QR6: No, an employer may either apply the payroll tax exemption or claim the WOTC for an employee, but not
both. An employer that wishes to claim the WOTC for a qualified employee may not apply the payroll tax exemption
with respect to any wages paid to that employee from March 19, 2010, through December 31, 2010.
QR7: If an employer applies the exemption to wages paid to a nonqualified employee, is the employer liable for the amount of employer social security tax on wages previously reported as exempt?
A-QR7: Yes, the employer is liable for the amount of employer social security tax on wages it erroneously reported as exempt, because the exemption is only applicable to wages paid to qualified employees. The employer must file Form 941-X for each prior quarter for which the exemption was erroneously applied.
QR8: How does application of the payroll tax exemption to wages paid to restaurant employees affect the 45B credit?
A-QR8: Certain food and beverage establishments can claim a credit under section 45B of the Internal Revenue Code
for social security and Medicare taxes paid or incurred by the employer on certain employee tips, referred to as the
“45B credit.” An employer could be eligible for both the payroll tax exemption and the 45B credit on certain tips if the employer has tipped employees who are also qualified employees under the HIRE Act. The payroll exemption is taken on the employer’s Form 941 and the 45B credit is taken on the employer’s income tax return. The payroll tax exemption applies to all wages paid to a qualified employee unless the employer elects out of the payroll tax exemption with respect to the employee. An employer that applies the payroll tax exemption with respect to a qualified employee will be entitled to a smaller 45B credit because the employer will pay only Medicare tax (and not social security tax) on the employee’s wages, including reported tips.
QR9: Some businesses use the services of workers who are employees of a temporary agency. Can the temporary agency claim the payroll tax exemption for its qualified employee working at a client business?
A-QR9: The temporary agency can apply the exemption with respect to wages paid to a qualified employee of the
temporary agency. This is determined based on when the employee begins employment with the temporary agency,
and not based on when the employee begins work at a client business of the temporary agency.
QR10: If a client business hires an employee who previously provided services to the business as an employee of a temporary agency, is the client business entitled to apply the payroll tax exemption?
A-QR10: The client business can apply the exemption if the worker is a qualified employee when he or she begins
employment with the client as its employee. That is, the worker must not have worked as an employee for any
business (including the temporary agency) for more than 40 hours in the 60 days prior to beginning employment with the client business.
) QR11: Does the payroll tax exemption apply for purposes of the Railroad Retirement Tax Act (RRTA)?
A-QR11: Yes, the payroll tax exemption applies with respect to a qualified employer’s liability for the portion of the Tier 1 tax under RRTA that corresponds to social security tax.  

References/Related Topics
• Payroll Tax Exemption for Hiring Unemployed Workers
• HIRE Act: Questions and Answers for Employers
FAQs About Qualified Employees
QE1: Who are qualified employees?
A-QE1: Qualified employees are individuals who begin employment with a qualified employer after February 3, 2010,
and before January 1, 2011, who have been unemployed or employed for 40 hours or less during the 60-day period
ending on the date such employment begins, who are not employed by the qualified employer to replace another
employee of that employer, unless the other employee separated from employment voluntarily or was terminated for cause, and who are not family members of or related in certain other ways to the employer.
 QE2: Do the qualified employees need to do anything to make it possible for their employer to claim the payroll tax exemption?
A-QE2: Yes, qualified employees must certify by a signed affidavit, under penalties of perjury, that they have not been employed for more than 40 hours during the 60-day period ending on the date they started employment. The IRS plans to issue a model affidavit that can be used for this purpose.
QE3: Is the 60-day period continuous, and can it span 2009-2010?
A-QE3: The 60-day period must be continuous and can span 2009-2010.
QE4: Does the payroll tax exemption apply to wages paid to an otherwise qualified employee hired to replace an existing worker whose employment terminated?
A-QE4: The payroll tax exemption does not apply to wages paid to an employee who is hired to replace an existing
worker, unless the existing worker terminated employment voluntarily or was terminated for cause.
QE5: Does the payroll tax exemption apply to wages paid to an employee who was previously laid off and then rehired by the same or a related employer after a 60-day period?
A-QE5: Yes, an employer may apply the payroll tax exemption to wages paid to a rehired employee who is otherwise
a qualified employee.
QE6: If an employer lays an employee off because of lack of work and later, when work picks up, hires a new employee, can the payroll tax exemption apply to wages paid to the new employee?
A-QE6: Yes, if the new employee is a qualified employee (i.e., was employed for less than 40 hours during the prior
60 days).
QE7: Does the payroll tax exemption apply only if the employer previously laid employees off?
A-QE7: No, the payroll tax exemption can apply to wages paid to any qualified employee.
QE8: If an employer hires a recent graduate who has been in school for some or all of the 60 days preceding the start of his employment, does the payroll tax exemption apply to wages paid to the employee?
A-QE8: Yes, if the employee is a qualified employee. It is not necessary that the individual was previously employed
and has lost his or her job to be a qualified employee.
QE9: Does the qualified employee have to work a set period of time for the employer to be eligible for the exemption?
A-QE9: No. Application of the payroll tax exemption does not require that a qualified employee be employed for a set
number of hours or a set number of weeks.
QE10: Is there a minimum age for qualified employees? Will high school summer hires and interns be considered eligible employees?
A-QE10: There is no minimum age requirement to be a qualified employee.
QE11: Can employers create their own affidavit or must they use IRS Form W-11?
A-QE11: Employers can use their own affidavit as long as it includes the same information as IRS Form W-11, Hiring
Incentives to Restore Employment (HIRE) Act Employee Affidavit, and is signed under penalties of perjury.
QE12: Must the signed affidavit (e.g., Form W-11) be notarized?
A-QE12: No
QE13: Should employers send signed employee affidavits, such as Form W-11, to the IRS?
A-QE13: No, the employer does not file or send signed employee affidavits to the IRS. The employer should retain
these affidavits with other payroll and income tax records.
QE14: Can an employer apply the payroll tax exemption even if an employee fails to sign an employee affidavit, such as Form W-11?
A-QE14: No. An employer can only apply the exemption on wages paid to a qualified employee. In order to be a
qualified employee, among other requirements, the employee must sign an employee affidavit such as Form W-11.
QE15: Is there a deadline for the employer to get the signed affidavit from the employee?
A-QE15: Yes, the employer must have the signed affidavit by the time the employer files an employment tax return
applying the payroll tax exemption. If the employer obtains the signed affidavit from the qualified employee after
wages are paid to the employee, the employer can still apply the payroll tax exemption to determine its liability on
these wages. In some cases this may require the filing of a corrected return for a prior quarter.
For example, an employer hires an otherwise qualified employee who begins employment on March 1, 2010 and is
paid wages in March. The qualified employee does not provide the signed affidavit until April 15, 2010. The employer
can claim the first quarter credit on the second quarter Form 941 for the amount of the exemption with respect to
wages paid to the qualified employee from March 19, 2010, through March 31, 2010, and can apply the exemption to
wages paid to the qualified employee starting April 1, 2010, despite the fact that the employee did not provide the
signed affidavit until April 15, 2010. In contrast, if the otherwise qualified employee does not provide the signed affidavit until August 1, 2010, the employer may not claim the first quarter credit on the second quarter Form 941 for wages paid to the qualified employee from March 19, 2010, through March 31, 2010, and cannot apply the exemption to wages paid in the second quarter because the employer did not obtain the signed affidavit by the time it filed its second quarter Form 941. Instead, the employer must file a Form 941-X to correct the second quarter of 2010 if it wants to claim the first quarter credit and apply the exemption to the second quarter wages paid to the qualified employee.
 QE16: May Form W-11 (or a similar form containing the same information as the Form W-11) be transmitted electronically and signed by way of electronic signature?
A-QE16: Yes, employers may obtain signed Forms W-11 (or similar forms containing the same information)
electronically. The electronic system generating the form must transmit the same information as the Form W-11, must ensure that the information transmitted and received is the information sent, and must document all occasions of user access that result in the transmission. The electronic transmission must be signed by way of an electronic signature by the employee whose name is on the Form W–11 and the signature must be made under penalties of perjury. The perjury statement must contain the language that appears on the paper Form W–11. The electronic system must inform the employee whose name is on the Form W–11 that the employee must make the declaration contained in the perjury statement and that the declaration is made by signing the Form W–11. The instructions and the language of the perjury statement must immediately follow the employee’s statements and immediately precede the employee’s electronic signature. The electronic signature must be the final entry in the employee’s Form W–11 submission. The act of the electronic signature must be made by the employee whose name is on the electronic Form W–11, and the signature must also authenticate and verify the submission, by making reasonably certain that the person accessing the system and submitting the form is the employee identified on the Form W-11. Upon request by the Internal Revenue Service during an examination, the employer must supply a hard copy of the electronic Form W–11, and a statement that, to the best of the employer’s knowledge, the electronic Form W–11 was made by the employee whose name is on the form. The hard copy of the electronic Form W-11 must provide exactly the same information as, but need not be a facsimile of, the paper Form W–11.
QE17: When does an individual “begin employment” for purposes of the HIRE Act?
A-QE17: The HIRE Act does not address when an individual begins employment; therefore, general principles relating to employment apply. Under these general principles, employment includes the establishment, maintenance, and termination of the employer-employee relationship, all of which depend on the facts and circumstances. Accordingly, an individual begins employment on the date when, based on the facts and circumstances of the particular situation, the employer-employee relationship is first established.  In the case of an individual who was previously employed by the qualified employer and whose employment was terminated, for purposes of determining qualified employee status, the individual begins employment on the date when, based on the facts and circumstances of the particular situation, the employer-employee relationship is reestablished.
QE18: Can an employee who has been on furlough, standby status or temporary layoff be a qualified employee when he or she resumes active status?
A-QE18: An individual in this circumstance can be treated as a qualified employee only if the furlough, standby status, or temporary layoff constitutes a termination of employment and, upon reestablishment of the employment
relationship, the requirements to be a qualified employee are satisfied. Whether the employment relationship has
terminated is based on facts and circumstances. See QE17, above, for a determination of when employment begins.
QE19: Does work performed as a self-employed individual count in determining whether an individual has been employed for 40 hours or less during the 60-day period ending on the date the individual begins employment for purposes of qualified employee status?
A-QE19: No. Only work performed as an employee counts in determining whether an individual has been employed
for 40 hours or less during the 60-day period.
QE20: Does the payroll tax exemption apply to wages paid to an employee hired to replace an individual who terminated employment voluntarily?
A-QE20: Yes, as long as the employee is otherwise a qualified employee.
QE21: Does the payroll tax exemption apply to wages paid to an employee hired to replace an individual whose employment was terminated due to gross misconduct?
A-QE21: Yes, as long as the employee is otherwise a qualified employee.
QE22: Does the payroll tax exemption apply to wages paid to an employee hired to replace an individual whose employment was terminated due to poor performance?
A-QE22: Yes, as long as the employee is otherwise a qualified employee.
QE23: Does the payroll tax exemption apply to wages paid to an employee hired to replace an individual whose employment was previously terminated in a reduction in force due to lack of work?
A-QE23: Yes, as long as the employee is otherwise a qualified employee. In addition, the payroll tax exemption can
apply to an employee whose employment was previously terminated in a reduction in force due to lack of work, and
who is later rehired, as long as the rehired employee is otherwise a qualified employee.
QE24: Can a minor sign a HIRE Act employee affidavit, such as Form W-11, which is required to be
signed under penalties of perjury?
A-QE24: Yes.
References/Related Topics
• Payroll Tax Exemption for Hiring Unemployed Workers
• HIRE Act: Questions and Answers for Employers
FAQs About Claiming the Payroll Exemption
PE1: How does the employer claim the payroll tax exemption for wages paid to qualified employees?
A-PE1: The payroll tax exemption is claimed on Form 941, Employer’s QUARTERLY Federal Tax Return, beginning
with the second quarter of 2010.
PE2: How does the employer claim the payroll tax exemption for wages paid to qualified employees during the period March 19 through March 31, 2010 (the first quarter of 2010)?
A-PE2: The payroll tax exemption for wages paid during this period will be claimed on the employer’s Form 941 for the second quarter of 2010.
PE3: Can an employer claim the COBRA premium assistance credit and the payroll tax exemption for new hires on the same employment tax return?
A-PE3: Yes.
PE4: How does application of the payroll tax exemption to wages paid to a qualified employee affect the availability of the Work Opportunity Tax Credit with respect to that employee?
A-PE4: If an employer applies the payroll tax exemption to wages paid to a qualified employee, such wages paid to
the employee during the one-year period beginning with the employee’s hiring date may not be taken into account for purposes of the Work Opportunity Tax Credit. An employer that wishes to claim the Work Opportunity Tax Credit with respect to a qualified employee can elect out of the payroll tax exemption with respect to wages paid to that qualified employee.
PE5: What is the significance of Feb. 3, 2010, and March 19, 2010, under the HIRE Act?
A-PE5: An employee must begin employment after Feb. 3, 2010, and before Jan. 1, 2011 in order to be a qualified
employee. The payroll tax exemption applies to wages paid to the qualified employee from March 19, 2010 (the day
after the date of enactment) through December 31, 2010.
PE6: How does the social security wage base affect the payroll tax exemption?
A-PE6: The exemption is applicable to wages that would otherwise be subject to the employer’s share of social
security tax (i.e., wages up to the social security wage base) that are paid to qualified employees from March 19,
2010, through December 31, 2010. The employer is still liable for the employer share of Medicare tax on all wages
and for withholding both the qualified employee’s share of social security tax on wages up to the social security wage
base ($106,800 for 2010) and Medicare tax on all wages.
 PE7: Is the payroll tax exemption based on when wages are earned by a qualified employee or when they are paid to a qualified employee?
A-PE7: The exemption is based on when wages are paid. Thus, only wages paid from March 19, 2010, through
December 31, 2010, qualify for the exemption (regardless of when those wages are earned). PE8: The HIRE Act allows qualified employers to elect out of the exemption. How is this done?
A-PE8: To elect out of the payroll tax exemption, the employer simply reports and pays the employer share of social
security tax on wages paid to qualified employees, along with the employee share of social security tax, Medicare
taxes, and withheld income tax. In other words, an employer does not need to specifically state that it is electing out of the exemption.
PE9: Does an employer have to choose to apply the payroll tax exemption with respect to all of its qualified employees?
A-PE9: No, the employer can choose to apply the exemption with respect to none, some, or all of its qualified
employees. However, if the employer applies the exemption with respect to any wages paid to a particular qualified
employee, the exemption must be applied to all wages paid to that employee from March 19, 2010, through December 31, 2010.
PE10: If an employer properly applies the payroll tax exemption on Form 941 for one or more prior quarters for a qualified employee who, as a certified member of a targeted group, also qualifies the employer for the work opportunity tax credit (WOTC), can the employer later elect out of the exemption, so it can instead claim the WOTC?
A-PE10: Yes, if an employer applied the payroll tax exemption for a qualified employee on Form 941 for one or more
prior quarters, the employer can later elect out of the exemption by filing Form 941-X for each affected prior quarter to correct its original return and pay the employer’s share of social security tax for each such prior quarter. The employer is then eligible to claim the WOTC on its income tax return.
PE11: How will employers claim the payroll tax exemption for wages paid to qualified employees from March 19, 2010, through March 31, 2010?
A-PE11: The payroll tax exemption that would be applicable to wages paid during the first quarter of 2010 cannot be
applied on the first quarter Form 941. Instead, the amount by which the employer’s social security tax would have
been reduced as a result of applying the exemption to wages paid during the first quarter is treated as a payment for
the second quarter. The credit for this payment may be claimed only on the second quarter Form 941 (lines 12c-12e)
and may only be claimed with respect to wages paid to qualified employees from March 19, 2010 (the day after the
date of enactment), through March 31, 2010. A seasonal employer that does not otherwise have to file Form 941 for
the second quarter must file Form 941 for that quarter in order to claim credit for the amount of the exemption that
would have applied to wages paid during the first quarter. The amount of the credit claimed on Form 941 for the
second quarter will be refunded to the employer or may be applied against a liability for a later quarter.
PE12: How will the IRS treat the credit claimed for wages paid in the first quarter?
A-PE12: The IRS will treat the credit as a deposit made on the first day of the second quarter for quarterly payroll tax
return filers.
PE13: What line on the revised Form 941 reflects qualified employees who begin employment in late March but are not paid until April? What line on Form 941 would reflect qualified employees paid wages and tips covered by the payroll tax exemption in March?
A-PE13: If a qualified employee begins employment in late March, but the employer does not pay the employee until
April, the employer will include the employee in the number reported on both lines 6a and 6b of the second quarter
Form 941 and will include wages paid to the qualified employee in the second quarter on line 6c. If a qualified
employee receives wages during the period of March 19 through March 31, the employer will include the qualified
employee on line 12c of the second quarter Form 941 and will include the wages paid in such period on line 12d.
PE14: If an employer does not apply the payroll tax exemption with respect to a qualified employee, is the employee still counted on lines 6a and 6b (or line 12c for 1st quarter) as a Qualified Employee?
A-PE14: The employer reports on lines 6a and 6b (or line 12c for 1st quarter) only qualified employees with respect towhom the employer is applying the payroll tax exemption. Similarly, the employer reports only wages paid to qualified employees to whom the exemption is applied on line 6c (or line 12d for 1st quarter).
A-PE15: Yes, line 6b is cumulative for qualified employees with respect to whose wages the employer is applying the
payroll tax exemption in that quarter. For example, if an employer hires 30 qualified employees in March, 30 in April, 30 in May, and 30 in June and applies the payroll tax exemption with respect to wages paid to all of the qualified employees in the second quarter, Line 6b would show 120 employees on the second quarter return.
PE16: Must employers apply the payroll tax exemption on the return for the quarter they paid the related wages, or can they apply it on a return for a later or earlier quarter?
A-PE16: Employers must apply the exemption on the return for the quarter in which they paid the related wages.
PE17: If the Form 941 liability is below $100,000 solely due to application of the payroll tax exemption, does the employer still need to make the deposit the next day?
A-PE17: No, if application of the payroll tax exemption to wages paid to qualified employees results in the liability
being below $100,000, the employer will not have a next-day deposit requirement. Instead, the employer will deposit based on its regular deposit schedule.
PE18: How will the employer report the payroll tax exemption on Schedule B? Does an employer reduce the liability reported and its deposits in the second, third, and fourth quarters of 2010 to account for the payroll tax exemption?
A-PE18: The employer will not separately report the payroll tax exemption or the first quarter credit on Schedule B.
An employer’s report of its liability for the second, third and fourth quarters of 2010 on Schedule B will reflect the
reduction in liability due to application of the payroll tax exemption to wages paid to qualified employees during those quarters. Since the payroll tax exemption reduces an employer’s liability on wages paid to qualified employees, the employer is not required to deposit the employer’s 6.2 percent share of social security tax on such wages. In addition, since the payroll tax exemption does not apply to the first quarter and the first quarter credit must be claimed on the second quarter return, an employer may reduce its deposits for the second quarter by the amount of the first quarter credit.
PE19: When will updated forms be available (e.g., Forms 941, 943, 944, 941-X)?
A-PE19: The IRS has revised the Form 941 for the second quarter of 2010 and a draft of the revised form is available
on IRS.gov. The IRS is in the process of updating Forms 943, 944 and 941-X.
PE20: When will the updated Form 94X Schema be available?
A-PE20: The IRS development of the 94X Schema is pending the finalized Form 941. The IRS anticipates it will be
available in May.
PE21: Will the IRS revise Form 941again in the third and fourth quarters to remove lines 12 (c) and 12(d)?
A-PE21: The IRS will not revise Form 941 for the third and fourth quarters of 2010. Employers will be directed by the
form and the instructions to leave those lines blank on the returns they file for the 3rd and 4th quarters.
PE22: Since there will be changes to the electronic filing schemas for employment tax returns such as the Form 941, will electronic filers need to recertify for all applications with the IRS?
A-PE22: No.
PE23: How will the payroll tax exemption affect the breakout amounts on EFTPS?
A-PE23: There will be no changes to the EFTPS system as a result of the payroll tax exemption. When an employer
makes EFTPS deposits, the employer should continue to enter amounts of Medicare tax, social security tax, and
income tax withholding, taking into account the reduction in liability due to the payroll tax exemption and, for the
second quarter, the credit for first quarter amounts.
PE24: Will employers have to indicate on the Form W-2 the qualified employees whose wages are exempt from the employers share of social security tax and/or separately report wages exempt from the employers share of social security tax?
A-PE24: Yes, new Code CC has been created for box 12 of Form W-2 for employers to identify qualified employees
and report the amount of wages and tips covered by the payroll tax exemption. In addition, new box 12b has been
created on Form W-3 to report the aggregate of Code CC.
PE25: Must an employer that uses a reporting agent provide the reporting agent with copies of Forms W-11 obtained from qualified employees?
A-PE25: No, the employer is not required to provide copies of Form W-11 to its reporting agent. There are no specific
procedures for employers that use reporting agents related to the payroll tax exemption. The employer is liable for
reporting and paying the correct payroll tax, including proper application of the payroll tax exemption, regardless of
whether the employer uses a reporting agent.
References/Related Topics
• Payroll Tax Exemption for Hiring Unemployed Workers
• HIRE Act: Questions and Answers for

Q1: What is the new hire retention credit and what does it apply to?
A1: This is a general business credit to encourage retention of new hires (retained workers). The employer may claim
the credit for each retained worker. A retained worker is a qualified employee (as defined for purposes of the payroll
tax exemption) who remains an employee for at least 52 consecutive weeks, and whose wages (as defined for income
tax withholding purposes) for the last 26 weeks equal at least 80% of the wages for the first 26 weeks. The amount of
the credit is the lesser of $1,000 or 6.2% of wages (as defined for income tax withholding purposes) paid by the
employer to the retained worker during the 52 consecutive week period.
Q2: If an employer chooses to claim the WOTC for a qualified employee, can the employer still
claim the new hire retention credit for that qualified employee?
A2: Yes, an employer may claim the retention credit for a qualified employee even if the employer has also claimed
the WOTC for the same employee.
The new hire retention credit can be claimed for any qualified employee, as defined for purposes of the payroll tax
exemption, once the employee is employed for 52 consecutive weeks, so long as the employee’s wages (as defined
for income tax withholding purposes) for the last 26 weeks of employment equal at least 80% of the employee’s wages
for the first 26 weeks of employment.
Q3: For what years can an employer claim the new hire retention credit with respect to a retained
worker?
A3: The credit may be claimed for a retained worker for the first taxable year ending after March 18, 2010 (the date of
enactment of the HIRE Act), for which the retained worker satisfies the 52 consecutive week requirement. However,
since retained workers must be qualified employees, the credit applies only for workers hired after February 3, 2010,
and before January 1, 2011.
Q4: Can a business carry back any portion of the new hire retention credit to use against a tax
liability for years beginning before March 18, 2010, the date of enactment of the HIRE Act?
A4: No, the portion of the general business credit attributable to the new hire retention credit cannot be carried back to
a taxable year that begins before March 18, 2010.
Q5: Can the new hire retention credit offset the business Alternative Minimum Tax?
A5: No, the new hire retention credit cannot be used to offset the business Alternative Minimum Tax.
Q6: Will the business deduction for compensation be reduced and or affected by the new hire
retention credit?
A6: No.

References/Related Topics
• Business Credit for Retention of Certain Newly Hired Individuals in 2010
• HIRE Act: Questions and Answers for Employers
FAQs About Retained Workers
Q1: Is the requirement that a retained worker remain an employee for at least 52 consecutive weeks
relevant only for purposes of the new hire retention credit?
A1: Yes, the 52-week requirement is used to determine eligibility for the new hire retention credit. It is not a
requirement for the payroll tax exemption.
Q2: When does the period start for determining whether a qualified employee has been employed
for at least 52 consecutive weeks?
A2: The period for determining whether a qualified employee has been employed for at least 52 consecutive weeks
starts on the date the employee begins employment with the employer. Refer to QE17 on FAQs About Qualified
Employees.
Q3: Does an employee have to work during the entire 52 consecutive week period in order to qualify
as a retained worker? For example, does unpaid vacation time or sick leave count for purposes of the 52
weeks?
A3: In order to be a retained worker, the qualified employee must be employed by the employer for a period of not
less than 52 consecutive weeks. Whether a qualified employee is employed for 52 consecutive weeks depends on the
facts and circumstances.
As long as the employment relationship is not terminated during the 52 consecutive weeks and the wages paid to the
qualified employee for the last 26 weeks of the 52-week period equal at least 80 percent of the wages paid to the
employee for the first 26 weeks, the employee will be a retained worker even if he or she is not performing services
the entire time.
References/Related Topics
• Business Credit for Retention of Certain Newly Hired Individuals in 2010
• HIRE Act: Questions and Answers for Employers

FAQs About Calculating and Claiming the Credit Q1: How will the new hire retention credit be claimed?
A1: The new hire retention credit will be claimed on the employer’s income tax return.
Q2: Do wages for purposes of the new hire retention credit include bonuses or taxable fringe
benefits?
A2: All remuneration that is considered wages for federal income tax withholding purposes is counted for purposes of
the new hire retention credit.
Q3: Can a fiscal year taxpayer claim the new hire retention credit on its 2010 income tax return?
A3: A fiscal year taxpayer may claim the new hire retention credit on its 2010 income tax return if the requirements for
the credit have been met by the end of its 2010 taxable year. For example, if a business with a taxable year beginning
April 1, 2010, hired a qualified employee on March 15, 2010, and the employee met the requirements for being a
retained worker by March 31, 2011, the business would be eligible to claim the credit on the return for the taxable year
beginning April 1, 2010, and ending March 31, 2011.
Q4: May an employer claim both the payroll tax exemption and the new hire retention credit with
respect to the same employee?
A4: Yes, as long as the requirements for each are met.
References/Related Topics
• Business Credit for Retention of Certain Newly Hired Individuals in 2010
• HIRE Act: Questions and Answers for Employers

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