On March 18, 2010, President Barack Obama signed into law the Hiring Incentives to

Restore Employment (HIRE) Act, which was designed to encourage employers to hire and retain workers. The legislation includes an exemption on payroll taxes through the end of 2010, a tax credit for hiring workers who have been unemployed, and a one-year extension of enhanced Section 179 expensing rules for small businesses.

A large portion of the $18 billion HIRE Act provides incentives for businesses to hire unemployed workers by offering payroll tax forgiveness through the end of the year and an additional $1,000 credit for each qualified retained worker. Under the new legislation, a qualified employer’s 6.2% Social Security tax liability is waived for wages paid on previously unemployed new hires for any period starting after March 18, 2010 through December 31, 2010. Both full- and part-time employees qualify for payroll tax forgiveness.

Generally, all private sector employers are eligible for this incentive. A qualified employee must begin work anytime after February 3, 2010 and before January 1, 2011, and he or she may not have been employed for more than 40 hours during the 60-day period that ends on the day the worker begins employment. A qualified worker is not permitted to take the place of a current employee, unless the employee was separated from employment voluntarily or for cause, and a worker who is related to the employer or who directly or indirectly owns more than 50% of the business does not qualify. However, the incentive may apply if a business rehires a worker who was previously laid off.

In addition, businesses that hire new employees who qualify for payroll tax forgiveness and keep them on the payroll for at least 52 consecutive weeks may qualify for an income tax credit of $1,000 for each qualifying worker. This new incentive is provided through the Code Section 38(b) business tax credit, which is increased, with respect to each qualified retained worker, by the lesser of $1,000 or 6.2% of wages paid by the taxpayer to the qualified retained worker during a 52-consecutive week period. Thus, given the 6.2% cap, employers would be eligible to collect the full $1,000 credit for any newly hired employee who earns more than $16,129 during the 52-week period.

Extending a provision originally included in 2008 stimulus legislation, the HIRE Act permits small businesses to expense up to $250,000 of Section 179 property purchased through December 31, 2010. This is equal to the deduction amounts permitted in 2008 and 2009, and up from $125,000 in 2007. The amount that may be expensed is reduced once the qualifying purchases exceed $800,000 in 2010. No extension of bonus depreciation, however, was included in the bill.

The Build America Bonds program, created by the American Recovery and Reinvestment

Act of 2009, is also enhanced under the HIRE Act. The program provides subsidies to municipalities issuing taxable debt. Among the tax credit bonds covered under this provision are qualified renewable energy bonds, energy conservation bonds, and school construction bonds.

Supporters of the new legislation speculate that the measure could lead to the creation of as many as 250,000 new jobs nationwide, while opponents are concerned about the amount that the bill could add to the Federal deficit. “Those provisions would certainly apply to a fairly broad range of businesses, and they would particularly apply to businesses that are in recovery from the recession and are in hiring mode,” says Mark Luscombe, principal Federal tax analyst at CCH, a provider of tax and business law information and software solutions. “But there’s a lot of debate about whether they are generous enough to cause a business to hire someone they wouldn’t otherwise hire.”

For more information about the Hiring Incentives to Restore Employment (HIRE) Act of 2010, consult one of our qualified tax professionals.