Arguably the most sweeping change to U.S. health care since the passage of Medicare and Medicaid is upon us. The combination of the Patient Protection and Affordable Care Act and the Healthcare and Education Reconciliation Act create myriad changes in health care. Most major provisions will be effective by January 2014, with others being phased in by 2020, and from a CPA’s perspective, that presents a wide range of financial and tax-planning challenges for business owners and managers.
One of the hottest topics of course is the small business health-care credit. In general terms, for years through 2013, qualifying small-business taxpayers may claim a credit of 35 percent, while small tax-exempt employers are eligible for a 25 percent credit. In 2014, an enhanced version of the credit will be available.
Many small businesses are trying to figure out what this means for them. The first step is to determine if your business is eligible. In order to claim the credit, an affirmative response to each of the following is necessary.
- Do you employ fewer than 25 full-time equivalent employees? Note: Multiple part-time employees are added together to determine FTEs.
- Is the average annual wage per FTE less than $50,000? Note: Total wages are divided by total FTE.
- Do you cover at least 50 percent of the cost of single (not family) health-care coverage for each of your employees?
If you were able to answer yes to all of these questions, your business could reap some significant benefit. And because the tax credit works on a sliding scale, businesses supporting more FTEs earning lower average wages will receive a larger benefit.
A quick example shows that a small-business employer eligible for a 15 percent credit who pays for qualifying health-care coverage that costs $75,000 per year will end up with a credit of $11,250.
The credit may be carried back to prior years or forward to future periods. And, in some cases, for tax-exempt organizations, the credit is refundable even if no taxes were paid. Of course, there are any number of limitations and caveats, so gaining a clear understanding is vital.
It is important to note that this is a tax credit. A tax credit differs from a deduction. Why is this important? Good question. Because small businesses may be able to claim both a deduction and a credit. The deduction is based on premiums paid in excess of the credit claimed.
If your head is spinning despite instructions available for Form 8941 and 990-T and information on the IRS website (www.IRS.gov) , you are not alone. Earlier this year, a report by the Government Accountability Office indicated that many small businesses passed on the health-care tax credit in 2010. According to the report, approximately 170,000 small businesses claimed the credit while 1.2 million to 3.8 million did not file for the credit even though they were eligible. If your business is part of the group that passed on the credit, it might make sense to re-visit the issue and consider amending your return.
Of course, there is much more to determining the right course of action than being eligible for a tax credit. Your CPA can help you make sense of the credit and more.
Gail Kinsella is a partner in the accounting firm of Testone, Marshall & Discenza, LLP. Contact Kinsella at firstname.lastname@example.org