TAX NEWS - June 2010

Rules Released on Small-Biz Tax Credits for Health Care

One of the first set of regulations issued for the new health care reform law deals with tax credits that small businesses can take advantage of this year.

Tracy DeBacco, a CPA with Cannon Wright Blount, said the rules require close attention because blanket statements may have caused misconceptions among business owners. The tax credit can be as high as 35 percent of the cost of insuring employees, but DeBacco cautions that there is a diminishing scale.

"We were given general explanations, which confused most of the public because they read what they wanted to read," she said. "Those generalizations are by no means exact. When you get into the calculations, it is not quite as beneficial as some people may have thought."

However, the credit is an improvement over what currently exits in the tax code, which is a deduction for insuring employees. Businesses can also take advantage of the tax credit this year, and use it to help them prepare ahead.

In 2014, many businesses will have to pay financial penalties for not providing health care coverage that meets government guidelines.

Until then, many small-business owners will be crunching numbers, learning about the regulations and comparing options. Bob Ellis, vice president of operations for The Barnett Group, a Memphis

company that manages benefits for about 54,000 individuals, said most will need some help.

"I would encourage the small employers – and all employers – to talk to the experts about what's going on and do that in ample time to get changes made that they need to get made," Ellis said. "Don't wait to the last minute to try to find out what's going on."

Congress passed the health care reform law in March, but made the tax credit for small businesses retroactive until Jan. 1 of this year.

Accountants began perusing the specifics about the tax credit after they were released May 17.

"This is not a simple thing at all," DeBacco said. "In fact, it took me a few hours to go through the details and read the law. I actually made myself a spreadsheet to make sure I understood it."

The spreadsheet showed a diminishing tax credit as the number of employees goes up and the average wage increases.

"The maximum credit, which is the deceiving part, is 35 percent of the amount you've paid in insurance premiums," she said. "That is the best-case scenario you can achieve if you have employees making less then $25,000 a year on average and you have 10 or fewer employees."

For each additional employee beyond 10, the credit is reduced by 6.667 percent, she said, while every $1,000 over $25,000 in the average wage scale reduces the credit by 4 percent.

Small businesses are defined as those with fewer than 25 full-time employees – a number that is calculated not by the number of positions, but by the

total number of hours that all employees work.

Business owners and their family members are excluded from the count, which makes it easier to qualify for the credit.

"The second requirement is that your average wage for all your employees must be less than $50,000 a year," DeBacco said. "The employer must be in a qualifying arrangement, whereby the employer pays no less than 50 percent of the health insurance premium for each employee."

Ellis does not provide tax advice, but he does help businesses set up benefit plans. He has received several questions from clients about several aspects of the law.

"The questions have really been all over the board," Ellis said.

Lots of these questions won't have answers until other facets of the law are set down in rules.

"I've been working on benefits since 1979," Ellis said. "More often than not, the government does not come out with those regulations as promptly as an employer would like for them to."

As 2014 approaches, many businesses will consider whether to provide benefits or pay the penalty.

"I think the hardest problem any employer has is to balance what the employees want and need from benefits package and how much the employer is able to provide," Ellis said. "That's partly financial, but it is partly employee relations-driven as well."