Small Business Tax Implications of Health Care Reform For 2010
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On March 23, 2010 President Obama signed into law one of the largest and most controversial pieces of legislation called the Patient Affordable Care Act (aka Health Care Reform Bill). This new legislation is so complex that it will take nearly eight years to fully implement. The first stage takes effect in 2010 with four distinct provisions. This article will address one of those provisions, The Small Business Tax Credit.
Beginning January 1, 2010, small businesses who contribute 50% or more toward their employees health
insurance premiums for are eligible for a non-refundable small business income tax credit. This provision creates two classes of employers:
1. Eligible small employers and
2. Large employers.
Eligible small employers are defined as employers with 25 or fewer full-time employees with average annual wages of ,000 or less. Everyone else exceeding these thresholds is, by default, a large employer and not eligible for the credit.
Full-Time Employees:
To determine the number of eligible full-time employees (FTE), an employer must divide total hours worked by all employees by 2,080. Total hours worked by employees cannot include hours worked by any employee that exceeds 2,080 hours for the year. Thus, overtime is excluded from the calculation of total hours. 5% owners and 2% S Corporation shareholders are not considered employees for purposes of the full-time employee calculation.
Average Annual Wages:
To determine the average annual wage base, an employer must divide total wages paid to employees during the year by the total number of full-time employees (from previous calculation). 5% owners and 2% S Corporation shareholders are not considered employees for purposes of the average annual wage base calculation.
Calculation of the Non-Refundable Income Tax Credit:
A maximum non-refundable income tax credit of 35% will be available only to employers with 10 or fewer full-time employees and average annual wages of ,000 or less. This credit is applied to the employer’s share of health insurance premiums and this dollar amount is the credit that is applied against business income tax (or passed through to partners or S Corporation shareholders). The amount of the credit utilized to reduce income tax reduces the employer’s health insurance deduction for the year.
These are the two baselines for the credit:
10 full-time employees and
,000 in average annual wages.
As the number of FTEs rise above 10 and/or the average annual wage base rises above ,000, the credit quickly disappears. This is known as a phase-out, and because of the complexity of the formula to determine an employer’s eligible credit, a table was created to make it easier to compute the eligible credit. For example, if an employer has 11 FTEs with an average annual wage base of ,000, the credit is 33%. For each additional FTE above 10, the credit is reduced by 2%. If an employer has 10 FTEs with an average annual base exceeding ,000, but not exceeding ,000, the credit is 28%. The credit is reduced by 7% as the average annual wage base exceeds the ,000, ,000, ,000, ,000 and ,000 average annual wage base table amount. If you use the tables, the credit is 0% once the total number of full-time employees exceed 24.9 or once the average annual wage exceeds ,999.
Other Rules:
1. Aggregation rules apply, which means affiliated companies must be aggregated in determining eligibility, the number of full-time employees and average annual wage base.
2. The credit may be applied against regular income tax and alternative minimum tax.
3. If an eligible small business employer qualifies for the credit but cannot use the credit in the current year, they may carry the credit back one year to use against the prior year’s income tax.
There is also a credit for non-profit organizations of 25%. This credit, unlike the 35% business credit, may be used to reduce the Medicare portion of payroll taxes (Form 941 will have a line item for this credit).
This article was published at Bookkeeping Services of Charlotte, NC
Some Business Tax Tips For 2010
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Keep in mind that
I am not a CPA nor am I a tax professional but I am, like many business owner, facing a lot of confusion in this arena, especially given the last two plus years of financial distress in the country and the constant changes to the tax code to generate more state and federal income.
Properly managing for taxes can really help a business survive from one year to the next. Do not get blindsided by your tax obligations and fatally hurt your business.
First things first: Understand how your form of business organization will be taxed. Some forms of organization are pass-through entities where all business income flows through to the individual owners’ personal tax returns (regardless if actual cash makes it into personal bank accounts) like partnerships, S Corporations and sole proprietorships while others are taxed as if they are separate, individual entities like C corporations.
So, while not covered here, business owners must therefore understand their state tax requirements. Some states have similar tax policies to that of the federal income tax, some states only certain tax income like capital gains from the sale of assets and some have completely different tax regulations where they only tax business asset values – but not income. Thus, know your state.
The first thing
a business should do is attempt to reduce its taxable income. This can come in the form of taking additional depreciation on business assets – look into the expanded Section 179 deduction – or from charitable contributions (make sure that the net effect benefits the business) or even from just realizing all business expenses that can be taken prior to the year’s end or the filing deadline (if permitted).
The following are some of the top issues businesses will face this tax year:
vs. Employees. Contractors. One of the biggest issues that businesses face is deterministic mining if a person is an employee and subject to taxes through the business or is an independent contractor responsible for their own taxes. The subject IRS provides detailed information on this. But, as a business owner, you do not want to have to make up for all the payroll taxes of a person who you thought was on independent contractor but the IRS deemed an employee simply by how that person was treated in the business.
Schedule K-1s – those, like some LLCs and partnerships and S Corporations must provide many accurate Schedule K-1 to the IRS. The main issue here is to match what those schedules to partners, members and owners show on their individual tax returns.
W-2s – it is the employer’s responsibility to file W-2s with the Social Security Administration showing total wages paid to employees. Further, those businesses with more than 250 employees MUST file their W-2s electronically.
Smaller business owners, earning less than 800 may qualify for the Earned Income Tax Credit (EITC).
Spouses. Many small businesses are operated by husband and wife teams and the IRS, depending on how each spouse is treated in the business, may tax these spouses differently. Some will be treated as partners or owners while other can be treated as employees (requiring the business to account for and pay Social Security and Medicare on their behalf not via their payroll – regardless if your business generates or payroll).
Lastly, regardless if you can pay your tax obligation or not, you should always file your business tax returns. This will go a long way in Ensuring that these taxing entities will work with you not against you, especially if they think you are trying to avoid paying your taxes.
Some Helpful Resources:
Score
offices, SBA offices and Small Business Development Centers – all of which are free to use and offer classes and seminars conducted by local tax professionals.
The IRS website which provides useful information for nearly every business tax issue as well as offers webinars that cover some of the most common tax issues for businesses.
Local
state sponsored resources. The IRS and many states have local offices in and around major cities in every state. These offices can be visited via in person or the phone and internet.
Lastly, the IRS, via its website, offers numerous ways to file for free your business should not be too complicated. Visit the IRS’s website and look for the Free File logo.
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