The Senate has approved legislation that provides companies with a payroll tax exemption for hiring new employees.

The Hiring Incentives to Restore Employment, or HIRE, Act passed on a bipartisan vote of 68-29, and will now go to President Obama for his signature. The Senate had voted to approve the same bill on Feb. 24, but it was modified by the House on March 4 and had to be voted on a second time (see Senate Passes Job Creation Bill). The final bill is estimated to cost $17.6 billion.

“The bill we passed today is a targeted approach designed to get Americans back to work right away by creating jobs to rebuild our country’s infrastructure and providing tax cuts for businesses to hire new workers,” said Senate Finance Committee Chairman Max Baucus, D-Mont., in a statement.

The bill contains a payroll tax exemption for newly hired employees, and was first proposed by Charles Schumer, D-N.Y., and Orrin Hatch, R-Utah. This provision offers an exemption from Social Security payroll taxes for every worker hired after Feb. 3, 2010, and before Jan. 1, 2011, who has been unemployed for at least 60 days. The maximum value of the credit would be equal to 6.2 percent of wages up to $106,800, the FICA wage cap.

An additional $1,000 income tax credit would be available to businesses for every new employee retained for 52 weeks, to be taken on the employer’s 2011 income tax return. “It’s really a short-term incentive to get more people hired,” said Ali Master, national director of business incentives and tax credit services with Ernst & Young.

The House modified the tax breaks by providing an exemption from the railroad retirement tax for qualified employers, paid in lieu of the Social Security payroll tax for certain railroad employees. The House also modified the income tax credit for retaining an employee for a consecutive 52 weeks to equal the lesser of $1,000, or 6.2 percent of the wages paid to the employee for those 52 weeks.

The House also modified the income tax credit so employers in U.S. possessions, such as Puerto Rico or the Northern Mariana Islands, are eligible for the credit. The House modification provided that allowable exemptions from the payroll taxes for the first calendar quarter of 2010 under the HIRE Act may only be treated as an advance payment of taxes owed for the second calendar quarter. This change was made in order to ease IRS implementation of the payroll tax exemption.

Another provision in the bill would extend 2008 and 2009 Section 179 expensing thresholds so that taxpayers may elect to write-off up to $250,000 of certain capital expenditures — subject to a phase-out once expenditures exceed $800,000 — in 2010 in lieu of depreciating those costs over time.

The bill also contains an election to convert tax credit bonds into Build America Bonds, plus it extends highway and transit programs in the Highway Trust Fund through calendar year 2010.

To offset the tax cuts, the legislation includes a set of measures to reduce offshore tax noncompliance by giving the IRS new tools to detect, deter and discourage offshore tax abuses. The provisions include 30 percent withholding on U.S. source payments to foreign financial institutions, foreign trusts, and foreign corporations that do not agree to disclose their U.S. account holders and owners to the IRS; requiring taxpayers to disclose their foreign accounts on their U.S. tax returns; increasing the statute of limitations to six years for failure to report certain offshore transactions and income; clarifying when a foreign trust is considered to have a U.S. beneficiary;  and treating substitute dividend and dividend equivalent payments to foreign persons as dividends for purposes of U.S. withholding. The provisions are estimated to raise $8.7 billion over 10 years.

Other revenue-raising provisions would delay once again the ability of taxpayers to make an election to take advantage of a rule for allocating interest expense between U.S. sources and foreign sources for purposes of determining a taxpayer’s foreign tax credit limitation. Congress had originally enacted the worldwide allocation of interest rule in 2004. However, implementation has been repeatedly delayed, and under the new legislation will now be postponed until at least 2021.

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