During the ragin’ battle over health care in the halls of Congress, senators and congressmen heeded Barack Obama’s call to enact a bill ostensibly aimed to encourage job growth along with watershed health care legislation. The tidewaters of March came, and Congress did not block up the hall. Congress enacted two bills, the HIRE Act (P.L. 111–147) and a package of health care legislation, which will usher in several new tax law rules. This article is the first in a series that will delve further into the new tax rules contained in each piece of legislation.
The HIRE Act primarily contains tax incentives to encourage businesses to hire unemployed workers. The incentives, as summarized below, include a payroll tax holiday and modest tax credits for retaining employees. The HIRE Act also expands the availability to expense the costs of certain assets, as well as expanding popular public finance bond programs.
Reports of the costs associated with the health care legislation (consisting of the Patient Protection and Affordable Care Act of 2010 and the Health Care Education Reconciliation Act of 2010, collectively the “Reconciliation Act”) have already begun to trickle through mainstream media. These reports have detailed the significant charges businesses have already taken for 2010 as a result of tax policy changes in the Reconciliation Act. The entitlements and mandates of the Reconciliation Act will also impose substantial new costs on state governments, which in turn may produce both opportunities and challenges for the gaming industry. These opportunities and challenges may arise as states examine expanding or authorizing new forms of gaming, such as i-gaming, or look to the gaming industry to fund the new health care mandates.
The Reconciliation Act contains several new revenue-raising provisions, some of which are health care-related and some of which are not directly tied to the health care industry. In addition to the revenue-raising measures, the Reconciliation Act offers some tax incentives and tax credits.
The gaming industry, like other businesses, may be able to benefit from the tax incentives of the HIRE Act. Gaming businesses will directly be impacted by the health care related aspects of the Reconciliation Act, as well as by many of the other significant tax law changes. As states struggle with the fiscal impact of the health care mandates, the gaming industry could be impacted by new state imposed taxes and fees. Future articles will address some of the tax law changes in greater depth. This article provides a general introduction to the various tax law changes through a high-level overview.
Tax Incentives in the HIRE Act
On March 10, 2010, one day after Congress enacted the HIRE Act, President Obama signed the act into law. The HIRE Act, among other matters, offers new tax incentives directed at encouraging businesses to hire and, ultimately, retain unemployed workers. The tax incentives span four different categories that are worthy of highlighting:
(1) The creation of an employer “payroll tax holiday”;
(2) The provision of a modest tax credit for employers that retain new hires for at least one year;
(3) An increase in the availability to expense certain assets under Section 179 of the Internal Revenue Code of 1986, as amended (IRC); and
(4) The expansion of popular public finance bond provisions.
Payroll Tax Holiday
Those who have spent time in Manhattan or northern New Jersey are sure to be familiar with the concept of “tax holidays.” The general notion is that a state or local taxing unit will designate specific days of a year when, for example, sales tax will not be imposed on purchases of consumer merchandise like clothing. The underlying purpose of a tax holiday is to stimulate purchases of merchandise and, correspondingly, help local businesses attract customers who would otherwise head to a mega-mall across the river. The casual reaction to a tax holiday is, quite simply, to raise this question: If reduced tax rates spur increased consumer spending, then why not just permanently reduce the tax rate in order to create a greater stimulus for consumer spending? While this question has either been lost on, or more likely, ignored by the decision-makers in Washington, D.C., and elsewhere, it is best not to look a gift horse in the mouth.
Turning directly to the new incentive, the payroll tax holiday provides some relief for Federal Insurance Contribution Act (FICA) taxes imposed on employers. FICA consists of two separate taxes: (1) the Old Age, Survivors and Disability Insurance (OASDI) tax; and (2) the Medicare Hospital Insurance (HI) tax. The FICA taxes are imposed separately on employers and employees (self-employed individuals pay an alternative tax, which is essentially equal to both the employer and employee portion of the FICA taxes). Employers pay FICA taxes on wages paid in connection with employment, while employees pay FICA taxes on wages received. The employer portion of the OASDI tax is currently equal to 6.2 percent on the wage base, which for 2010 is capped at $106,800. The HI tax rate is currently equal to 1.45 percent on wages paid and is not subject to a wage cap.
The HIRE Act payroll holiday grants certain employers, referred to as “qualified employers,” relief from their share of OASDI in 2010 for wages paid to “qualified individuals.” The tax holiday lasts from March 19, 2010, through Dec. 31, 2010. A “qualified individual” must perform services (1) in the trade or business of a qualified employer or (2) in furtherance of an exempt purpose of a qualifying tax-exempt organization. For purposes of the payroll tax holiday, a “qualified employer” is defined as any business other than a governmental unit. A “qualified individual” is any person who:
(1) Begins employment after Feb. 3, 2010, and before Jan. 1, 2011;
(2) Certifies, under penalties of perjury, that the person has not been employed for more than 40 hours during the 60-day period ending on the date he or she begins employment;
(3) Is not employed to replace another employee, unless such employee voluntarily separated from employment or was terminated for cause; and
(4) Is not a “related person” to the employer.
The maximum credit available under the payroll holiday is $6,621.60, which is calculated by multiplying 6.2 percent by the 2010 wage base cap of $106,800. The credit is not available for the payroll tax installment payment paid in the first quarter of 2010; however, employers will receive a credit equal to what they would otherwise have received for the first quarter against the second quarter installments. An employer can affirmatively elect out of the payroll holiday. Election out of the payroll tax holiday would allow the employer to remain eligible for the Work Opportunity Tax Credit.
Retained Workers Credit
The second credit for employers created by the HIRE Act increases the general business credit under IRC § 38 by up to $1,000 for each “retained worker.” A “retained worker” is a person (1) employed by the business on any date during the tax year, (2) was employed for a period of not less than 52 consecutive weeks, and (3) whose wages during the last 26 weeks of employment equal at least 80 percent of the wages paid during the first 26 weeks. From a planning perspective, employers will need to implement recordkeeping procedures to track hired employees in order to establish which employees satisfy the definition of “retained worker” and qualify the business to take the credit.
Section 179 Expensing
Under the HIRE Act, a business may elect to expense the cost of qualifying property under IRC § 179. Property eligible for IRC § 179 expensing includes tangible personal property used in an active trade or business and certain computer software placed in service prior to 2011. Such property would otherwise be subject to deprecation or amortization. Previously, a business could expense a maximum of $134,000 in eligible property under IRC § 179, with this limit being reduced dollar-for-dollar for the cost of eligible property that exceeded $540,000. The HIRE Act increases the IRC § 179 limit to $250,000, which is reduced dollar-for-dollar for the cost of eligible property that exceeds $800,000.
Public Finance Bonds
The American Recovery and Reinvestment Act (ARRA) introduced several new categories of tax-exempt and tax credit bonds. One new category of bonds, Build America Bonds (BAB), has become wildly popular in financial markets. To qualify as a BAB, the bond must meet certain requirements, specifically, satisfying requirements to otherwise qualify as a tax-exempt bond that is issued to finance capital projects. At the election of the issuer, a BAB may be issued as a tax credit or a direct payment subsidy bond. The federal government pays the direct payment subsidy to the issuer. A direct payment BAB economically produces a lower borrowing cost—or, to put it another way, a greater subsidy—than opting for a tax credit to bondholders, a point recognized by Congress in the ARRA committee reports. As a result of the market response, Congress extended direct payment subsidies—so-called BABification—for other categories of bonds. These other categories include new clean renewable energy bonds, qualified energy conservation bonds, qualified zone academy bonds, and qualified school construction bonds. The expanded subsidy for these various forms of bonds may be of particular interest to Indian tribal governments.
New Tax Rules
In addition to mandating most individuals to obtain minimum health insurance coverage, the Reconciliation Act introduces several new tax rules. The new tax rules can be divided into categories directly relating to health care/health insurance and unrelated areas. The host of new tax rules largely operates as revenue-raising measures to offset the cost of new health care entitlements created by the Reconciliation Act. An entire treatise could be written on many of the new tax rules. This article merely provides a general overview of some of the more significant tax rules that may be of interest to the gaming industry. In future articles, some of these new tax rules will be explored in greater depth.
Health Care-Related Tax Rules
The health care-related tax rules created by the Reconciliation Act include:
(1) A penalty tax for remaining uninsured after 2013. The penalty tax, which will be phased-in beginning in 2014, wil ultimately reach the greater of (a) 2.5 percent of household income exceeding certain thresholds, or (b) $695 per uninsured adult in a household. The total household penalty will be capped.
(2) A tax credit for low-income individuals to participate in national health exchanges. The credit will be available to individuals and families with incomes that do not exceed 400 percent of the federal poverty level.
(3) An excise tax on certain “Cadillac” health insurance plans. The Reconciliation Act imposes a 40 percent excise tax which is not deductible on insurance companies and plan administrators for plans with premiums that exceed $10,200 for single coverage and $27,500 for family coverage. Significantly, the excise tax is imposed on self-insured plans.
(4) Beginning in 2011, employers will be required to include the value of health insurance benefits on IRS Form W-2. This obligation will add a significant administrative burden to employers by requiring employers to track the value of health insurance benefits, maintain adequate records and report the value on Form W-2.
(5) A 0.9 percent rate increase on the HI portion of FICA taxes for individuals earning more than $200,000, or $250,000 for married couples filing joint returns.
(6) A 3.5 percent surtax on “net investment income” for taxpayers above certain threshold amounts. The threshold amounts are $250,000 for joint returns, $125,000 for married couples filing separately, and $200,000 for all other taxpayers.
(7) Limiting health flexible spending account (FSA) contributions to $2,500 and narrowing the scope of medical expenses that may be reimbursed through FSA and other similar tax-preferred health accounts.
Non-Health Care-Related Tax Rules
Other significant tax rules created by the Reconciliation Act include the codification of the economic substance doctrine, increased reporting obligations for corporations making payments exceeding $600, and increasing the required corporate estimated tax payment factors by 15.75 percent for corporations with assets of at least $1 billion.
Recent congressional action in March 2010 has created several new tax rules, many of which will impact gaming businesses. The HIRE Act offers some modest incentives to hire unemployed workers. The Reconciliation Act introduces several new tax rules that gaming businesses will be forced to grapple with on a going-forward basis. Future articles will explore some of the new tax rules in greater depth. As Bob Dylan wrote back in 1963, “The line it is drawn, the curse it is cast … for the times, they are a-changin.’ ” This is especially true as businesses wrestle with these new tax law changes—and as gaming businesses remain vigilant, should states set their sights on the gaming industry to fund the new health care mandates.