The Case of the Missing Small Business Health Care Tax Credit. Agenda

Transcription

1 The Case of the Missing Small Business Health Care Tax Credit Mark Bole, EA July 11, 2012 CSEA Annual Meeting, Redding, CA Agenda Identify the business clients who meet the basic criteria for the credit Learn to gather the required data and properly prepare Form 8941 (and Form 3800) Help business clients plan to maximize the credit in coming years Review in brief other health-care related tax benefits for businesses (if time permits) Copyright 2012 Mark Bole, EA 1 1

2 Facilitator Introduction Agenda Identify the business clients who meet the basic criteria for the credit Learn to gather the required data and properly prepare Form 8941 (and Form 3800) Help business clients plan to maximize the credit in coming years Review in brief other health-care related tax benefits for businesses (if time permits) Copyright 2012 Mark Bole, EA 2 2

3 Under the Affordable Care Act (PPACA, aka Obamacare), from 2010 to 2015 (not!), a credit is available for employers who provide health insurance for their employees. What Is It? 25 or fewer full-time equivalent (FTE) employees Pays an average annual wage of no more than $50,000 Pays health insurance premiums for employees under a qualifying arrangement (minimum 50% for 2010) Why Is It Missing? IRS mailed postcards * to over 4 million small businesses and tax-exempts to ensure they are aware of the new credit. (News Release IR ) Count per State for Special Post Card Notice California 502,923 11% New York 340,358 8% Texas 292,593 7% Florida 289,995 7% Illinois 194,072 4% Other states 2,821,206 64% Total 4,441, % * At a reported cost of approximately $1 million Copyright 2012 Mark Bole, EA 3 3

4 Why Is It Missing? Why Is It Missing? According to the IRS, it has completed more than 1,000 outreach and educational actions The IRS also used Press releases Electronic messages A telephone line Presentations An internet page YouTube video Copyright 2012 Mark Bole, EA 4 4

5 Why Is It Missing? messages received Sep 2011 through May 2012 mentioning the Small Employer Health Care Credit Why Is It Missing? The IRS conducted focus groups with tax practitioners in conjunction with its Nationwide Tax Forums Few had completed Form 8941 Instructions for calculating the FTEs were not clear The Credit is not easy to calculate Payroll information needed was not readily available Practitioners indicated that in the current economy, the Credit was not enough to encourage their clients to start offering insurance. Copyright 2012 Mark Bole, EA 5 5

6 Why Is It Missing? What Is The Big Deal? Example: One employee $20,000 wages 800 hours [$20, hr = $25/hr] employer paid 50% of health insurance = $1,000 Credit = $350 Copyright 2012 Mark Bole, EA 6 6

7 What Is The Big Deal? Takes into account different rates for different states Here s the Complication Previous example: One employee $20,000 wages 800 hours [$20, hr = $25/hr] employer paid 50% of health insurance = $1,000 Credit = $350 New example: Add one employee $30,000 wages (+ 20,000 = $50,000 total) 2,000 hours [$30,000 2,000hr = $15/hr] (+ 800 = 2,800 hours total) employer paid 50% of health insurance = $1,000 (+ $1,000 = $2,000 total) Credit = $0 What happened? Isn t the average annual wage per FTE still below $50K? Copyright 2012 Mark Bole, EA 7 7

8 What Is The Big Deal? Common sense calculation: (2, ) hrs 2,080 hrs/yr = 1.35 FTE $50, = $37,143 average wage But that s not how the credit works! Who Is An Eligible Employer? Of the roughly 6 million employer businesses in this country, the National Federation of Independent Businesses, which opposes the president s healthcare law, [emphasis added] found that less than 2 million have the size, payroll, and insurance coverage requirements to be eligible for the credit. Only one-third? I ll take that! Copyright 2012 Mark Bole, EA 8 8

9 Who is Really an Employer? PEO s (Professional Employer Organizations) leased employees count, as long as premiums are paid by employer (not PEO) and has performed services for you substantially full time for at least 1 year. Connecting employer to PEO is problematic for IRS Audit of payroll tax returns possible Household employers does not need to be a trade or business! Who is Really an Employer? Tax-exempt organizations described in IRC section 501(c) and exempt from tax under section 501(a) may also qualify The Credit is refundable to tax-exempt organizations, but only to the extent it does not exceed the total amount of income tax and Medicare tax withholding from employees wages and the employer share of Medicare tax (alert: audit risk!) Copyright 2012 Mark Bole, EA 9 9

10 Who is Really an Employer? Employers located outside the United States as long as premiums paid to US insurer Employers who are part of a controlled group or affiliated service group (IRC 414(b), (c), (m), or (o)) are treated as a single employer Who is Really an Employee? These are NOT an employee for purposes of the credit: Sole proprietors Partners in a partnership Shareholders owning more than two percent of an S corporation Any owners of more than five percent of other businesses Copyright 2012 Mark Bole, EA 10 10

11 Who is Really an Employee? These are NOT an employee for purposes of the credit: Relatives of the owners (the qualifying relative definition, includes in-laws, aunts/uncles, nieces/nephews, parents/stepparents, etc) Dependents of the owner(s) in the same household Spouses of the owners Who is Really an Employee? Seasonal workers are disregarded in determining FTEs and average annual wages unless the seasonal worker works for the employer on more than 120 days during year Ministers if, under the common law test, the minister is an employee, the minister is taken into account in determining an employer s FTEs and premiums paid Copyright 2012 Mark Bole, EA 11 11

12 Who is Really an Employee? Former employees who terminated employment during the year Employees covered under a collective bargaining agreement Employees who do not enroll in their employer s health insurance plan (whether or not they are covered under another health insurance plan) What about Wages & Hours? Wages are all payments subject to Medicare withholding Wages and hours include PAID vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence If employee works more than 2,080 hours in a year, include all overtime wages but maximum 2,080 hours Copyright 2012 Mark Bole, EA 12 12

13 What is Really a Health Plan? An arrangement under which the employer pays premiums for each employee in a uniform percentage (not less than 50 percent) of the premium cost of the coverage Includes hospital or medical policies or service plans; dental or vision; long-term care HSAs and Self-Insured Plans, including HRAs and FSAs, are not Qualifying Arrangements What is Really a Premium Payment? Premiums paid for seasonal employees may be counted, even if worked less than 120 days Limited to the premium payments the employer would have made using the average premium for the small group market in the State For more information about plans, premium payments, and transition relief, see Instructions for Form 8941 Copyright 2012 Mark Bole, EA 13 13

14 Agenda Identify the business clients who meet the basic criteria for the credit Learn to gather the required data and properly prepare Form 8941 (and Form 3800) Help business clients plan to maximize the credit in coming years Review in brief other health-care related tax benefits for businesses (if time permits) Flowing the Credit thru the Tax Return Most businesses and individuals report as part of the General Business Credit (Form 3800) and then transfer (to the extent allowed) to Form 1120 or Form 1040 Partnerships, S corporations, estates and trusts report as part of Schedule K Tax-exempt organizations report on the Exempt Organization Business Income Tax Return (Form 990-T). Copyright 2012 Mark Bole, EA 14 14

15 Tax Return Flow Illustrated Collect Data from Taxpayer Simple spreadsheet for basic situation: Copyright 2012 Mark Bole, EA 15 15

16 Why Does This Fail? Previous example: One employee $20,000 wages 800 hours [$20, hr = $25/hr] employer paid 50% of health insurance = $1,000 Credit = $350 New example: Add one employee $30,000 wages (+ 20,000 = $50,000 total) 2,000 hours [$30,000 2,000hr = $15/hr] (+ 800 = 2,800 hours total) employer paid 50% of health insurance = $1,000 (+ $1,000 = $2,000 total) Credit = $0 What happened? Isn t the average annual wage per FTE still below $50K? The Evil of Rounding Down FTE s are rounded DOWN, so even 1.9 FTE yields only 1 FTE for the credit calculation. This drives average wages UP. Phase-out starts at $25K and ends at $50K average annual wages. Common sense $50, FTE = $37,143 average wage Phase-out complete at $50K Copyright 2012 Mark Bole, EA 16 16

17 Alternative Hours to the Rescue! Three different methods for counting total hours of service. (Regardless of the method used, do not count more than 2,080 hours for any one employee.) 1. Actual hours. Count the actual hours of service for each employee. 2. Weeks-worked equivalent hours. Count 40 hours for each week that the employee has at least one hour of service. 3. Days-worked equivalent hours. Count 8 hours for each day that the employee has at least one hour of service. Using Weeks Worked Method Assume each of the two employees managed to clock in at least one hour of work (or paid time off) every week of the year. Rounding UP with a vengeance Copyright 2012 Mark Bole, EA 17 17

18 Using the Alternate Methods To Avoid Phase-Outs Why use alternate methods? To avoid phaseouts. FTE Limitation credit is reduced if more than 10 FTEs for the tax year. If 25 or more FTEs, credit is reduced to zero Average Annual Wage Limitation credit is reduced if average annual wages of more than $25,000 for the tax year. If $50,000 or more, credit is reduced to zero Using the Alternate Methods To Avoid Phase-Outs Two scenarios: Need to drive average wage down to get under the $50K max phase out, so maximize hours Need to drive FTE down, to get under the 25 FTE max phase out, so minimize hours Need not use the same method for all employees, for example, use the actual hours method for all hourly employees and the weeks-worked method for all salaried employees May change the method for calculating employees hours of service for each taxable year Copyright 2012 Mark Bole, EA 18 18

19 Using the Alternate Methods To Avoid Phase-Outs The two phase-outs are additive. For example, let s assume 19 FTE s and $35,000 average wage. FTE limit: the phase-out is straight-line over the last 15 employees (begins at 10, ends at 25). So (19 10) 15 = 60% reduction Avg Annual Wage limit: the phase-out is straight-line over the last $25K wages (begins at $25K, ends at $50K). So (35,000 25,000) 25,000 = 40% reduction The two phase-outs together reduce credit to zero. Using Software To Optimize Credit Many possible values for the credit, depending on which servicehours method you use and how you apply it to classes of employees. Software is your friend! UltraTax: ProSeries: You figure it out Copyright 2012 Mark Bole, EA 19 19

20 Collect Data from Taxpayer Need to collect days and weeks worked too: Add two columns, one for days worked, one for weeks worked Credit Reduces Deduction Employers will continue to be able to deduct the costs in excess of the Credit amount as an ordinary expense for employee compensation. Example: Copyright 2012 Mark Bole, EA 20 20

21 State Subsidies For employers receiving a State credit or subsidy for health insurance, Credit cannot exceed the employer s actual premium payment. Include subsidy when calculating Credit CA does not have any state subsidy, per my research Carryback, Carryforward (Form 3800) For 2010, the unused credit can be carried forward 20 years as a general business credit For 2011, the unused credit can be carried back to 2010, the first year that the credit was in effect. Any unused credit can then be carried forward to 2012 and later years Copyright 2012 Mark Bole, EA 21 21

22 Agenda Identify the business clients who meet the basic criteria for the credit Learn to gather the required data and properly prepare Form 8941 (and Form 3800) Help business clients plan to maximize the credit in coming years Review in brief other health-care related tax benefits for businesses (if time permits) What s Coming? The $50,000 wage threshold is adjusted for inflation after 2013 The maximum credit percentage increases from 35% to 50% after 2013 (increase to 35% for tax-exempt) After 2013, the credit may be claimed for no more than two consecutive years After 2013, qualified health plans must be through a state exchange Copyright 2012 Mark Bole, EA 22 22

23 IRS Advice Some businesses and tax-exempt organizations that already locked into health insurance plan structures and contributions may not have had the opportunity to make any needed adjustments to qualify for the credit for 2010 or These employers can still make the necessary changes to their health insurance plans so they qualify to claim the credit on 2012 returns or in years beyond. Optimize the Credit Arrange for employees to have at least one paid hour per day or per week if needed to avoid average annual wage limitation, using alternate hours-worked methods Ongoing record keeping to ease year-end Copyright 2012 Mark Bole, EA 23 23

24 Look at After-Tax Cost of Health Insurance Credit available for two years beginning 2014 at increased rate, but cost of insurance continues beyond Sample calculation 9 : Total employer cost 25% bracket Agenda Identify the business clients who meet the basic criteria for the credit Learn to gather the required data and properly prepare Form 8941 (and Form 3800) Help business clients plan to maximize the credit in coming years Review in brief other health-care related tax benefits for businesses (if time permits) Copyright 2012 Mark Bole, EA 24 24

25 References 1. IRS Notice Hearing Before The Committee On Ways And Means Subcommittee On Oversight, U.S. House Of Representatives, Implementation and Effectiveness of the Small Business Health Care Tax Credit, TIGTA, November 15, IR , IRS Encourages Small Employers to Check Out Small Business Health Care Tax Credit - IRS YouTube Video 4. IRS Notice IRS Publication IRS Instructions for Form PPACA - additional IRS and Treasury Guidance on Health Insurance Plans, Cherie J. Hennig, Ph.D. and Bob Thompson, NATP TAXPRO Journal Winter PPACA and the small business Health Insurance Credit, Cherie J. Hennig, Ph.D. and Bob Thompson, NATP TAXPRO Journal Fall References Overview of Key Tax Provisions of Health Care Reform Acts (HR3590 and HR4872), The Tax Institute at H&R Block, As of: 4/25/2011 (NAEA free research service) 12. IR , March 13, 2012, IRS Encourages Small Employers to Check Out Small Business Health Care Tax Credit Copyright 2012 Mark Bole, EA 25 25

26 Thank you! Questions? Copyright 2012 Mark Bole, EA 26 26