Health care tax credit can help small companies
John Barghini,
Hansen Jergenson,
Nergard & Co.:
952.893.6740
johnb@hjnandco.com
www.hjnandco.com
FOR PUBLIC ACCOUNTANTS, the primary tax season ramps up in January. Although many of us advise on taxes all year, now is the time when many individual clients and business owners start asking important questions about how to save on the 2010 income tax filing – this year by April 18.
According to the Minnesota Society of Certified Public Accountants, one potential opportunity for small employers is the Small Business Health Care Tax Credit. If you employ fewer than 25 full-time equivalent employees (not including yourself) and your payroll averages less than $50,000 per employee, you may receive a tax credit that applies dollar for dollar to your bottom line tax liability. (The credit phases out to zero as you reach 25 employees and the $50,000 per employee cap.)
That is where the simplicity ends. Many factors can affect whether you qualify or will benefit substantially from the credit. But it can give small employers more purchasing power by reducing the overall cost of health insurance premiums.
On average, small employers pay higher insurance premiums than large employers primarily due to the size of the employee pool. Netting the credit may help small employers pay less overall for benefits, potentially helping them continue to offer benefits or improve the quality of health benefits.
How it works
Assuming that you do qualify for the credit, here’s how it works. Let’s say you have 10 employees and pay about $6,000 in insurance premiums annually for each employee. Your total cost for premiums is $60,000 a year. At the 35 percent full credit rate, your credit would be $21,000 (60,000 x .35). That dollar for dollar tax savings could reduce your tax liability by $21,000. If this credit is utilized, you must decrease the amount you deduct as an insurance expense by an amount equal to the credit taken.
For instance, if you have a $21,000 credit, you reduce your insurance expense deduction by $21,000. Losing the $21,000 insurance expense deduction from the original $60,000, assuming a 35 percent tax rate, would increase your tax liability by $7,350. However, the $21,000 credit would more than offset this lost deduction.
There is one potential downside to reducing the insurance expense deduction. Recovering income tax from previous years due to a reported business loss (carryback option) may not result in as large a tax recovery compared to taking the full deduction. In this situation, you’ll want to explore alternative income tax recovery options.
This credit can carry forward if you have no tax liability in 2010. For example, if the $21,000 credit exceeds your 2010 tax liability, the credit can carry forward to the 2011 tax season (you will not receive a tax refund if the credit exceeds your liability). This carryover option is especially beneficial for pass-through entities such as partnerships where individual owners report the entity income on their personal returns.
The Small Business Health Care Tax Credit is available for tax years 2010 through 2013. After 2013, the credit may be extended and potentially provide a higher credit, if employers obtain their health insurance through a state health insurance exchange.
In theory, these exchanges would put all health insurance plan providers on a level playing field so that purchasers of health insurance like you can more easily compare apples to apples and choose the best plan. How that level playing field is achieved has been largely left up to each state.
State exchanges must be available to all consumers and small businesses by 2014. In Minnesota, the Legislative Commission on Health Care Access has a Health Insurance Exchange Working Group that is meeting regularly to discuss the scope and structure of a state health insurance exchange.
Time to review
Regardless of whether you qualify for the tax credit, review your health care benefit plan annually with your insurance agent to make sure you get the maximum benefits for your dollar while maintaining provider and service choice for your employees.
In addition, you could also realize some savings by discussing your benefit plan package with a CPA who focuses on tax planning or health care plan design. A certified public accountant can assist with decisions throughout the year that may reduce your premiums, help you gain a better tax advantage on your return and understand how opportunities like the Small Business Health Care Tax Credit apply to your situation.
Managing the increasing complexity of health care benefits and tax decisions isn’t a once-a-year activity. If you haven’t already made this resolution, consider adding a CPA to your team of advisers in 2011.
The Minnesota Society of Certified Public Accountants offers a referral service that helps you choose the right CPA for you: 800.331.4288; www.mncpa.org/taxhelp
