Here are five facts you should know about a tax credit available for child care expenses. The Child and Dependent Care Credit is available for expenses incurred during the summer and throughout the rest of the year.
The cost of day camp may count as an expense toward the child and dependent care credit.
Expenses for overnight camps do not qualify.
If your childcare provider is a sitter at your home or a daycare facility outside the home, you'll get some tax benefit if you qualify for the credit.
The actual credit can be up to 35 percent of your qualifying expenses, depending upon your income.
You may use up to $3,000 of the unreimbursed expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit.
For more information about deducting child care expenses, consult your tax adviser.
]]>An ESE is an employer with no more than 25 full-time equivalent employees (FTEs) employed during its tax year, and whose employees have annual full-time equivalent wages that average no more than $50,000. However, the full credit is available only to an employer with 10 or fewer FTEs and whose employees have average annual full-time equivalent wages from the employer of not more than $25,000.
The new guidance adopts a liberal approach to the new law's requirements, including three alternative methods for figuring total hours of service (important for determining how may FTEs an employer has), and also explains how small employers claim the credit if their State provides a credit or subsidy for employee health coverage.
The IRS has released a state-by-state table of average health insurance premiums for the small group market for the 2010 tax year. The table is needed to calculate the credit for this year.
]]>begin employment with the employer after Feb. 3, 2010 and before Jan. 1, 2011,
certify by signed affidavit, under penalties of perjury, that they haven't been employed for more than 40 hours during the 60-day period ending on the date the individual begins employment with the qualified employer;
do not replace other employees of the employer (unless those employees left voluntarily or for cause), and
aren't related to the employer under special definitions. The payroll tax relief applies only for wages paid from Mar. 19, 2010 through Dec. 31, 2010.
Employers may qualify for an up-to-$1,000 tax credit for retaining qualified individuals. The workers must be employed by the employer for a period of not less than 52 consecutive weeks, and their wages for such employment during the last 26 weeks of the period must equal at least 80% of the wages for the first 26 weeks of the period.
]]>Before the first meeting.
Employers should establish an internal team before the IRS meeting. The team should consist of payroll, accounts payable, accounting, human resources, internal auditing, general counsel, and outside tax professionals. A person (point person) should be appointed by the internal team to manage the examination and supervise the input from employees.
The point person should assemble and regulate the flow of information between the IRS and the employer. The point person should review all information before it is turned over to the IRS and be present during tours and interviews of employees. This type of setup will increase the likelihood that the information provided to the IRS is organized, complete, and focused. An important caution is that employers should not to try to restrict or hide information.
Information requests.
The IRS requests information that it would like to look at during tax examinations on Form 4564, Information Document Request. The requests should be given to the point person. Employers are required to provide the IRS with all the information that the Service islegally allowed to request. However, employers are not required to provide any information that is not specifically requested by the IRS.
Problems with the IRS agent.
It is perfectly acceptable to have unresolved audit issues with the auditors. And it’s important to know that an audit can be stopped if an employer feels that an agent is not conducting himself/ herself professionally. The matter should then be discussed with the auditor’s supervisor.
Appeals.
Unresolved tax examination issues that are not part of the closing agreement may be appealed to the IRS Appeals Office. Open audit issues that cannot be resolved with the Appeals Office may be litigated through a formal trial. This option should be chosen only as a last resort because of the time and expense involved in the litigation of tax disputes.
]]>Medicare tax on investment income.
For tax years beginning after Dec. 31, 2012, a 3.8% tax will apply to net investment income of higher income taxpayers. The tax for individuals is 3.8% of the lesser of (1) net investment income or (2) the excess of modified adjusted gross income (MAGI) over the threshold amount.
Threshold amount.
The threshold amount is $250,000 for a joint return or surviving spouse, $125,000 for a married individual filing a separate return, and $200,000 in any other case.
MAGI.
MAGI is AGI increased by the amount excluded from income as foreign earned income under (net of the deductions and exclusions disallowed with respect to the foreign earned income. Only individuals with MAGI above the applicable threshold amount will be subject to the tax. An individual will pay the 3.8% tax on the full amount of his net investment income if his MAGI exceeds his threshold amount by at least the amount of the net investment income.
Application to estates and trusts.
For an estate or trust, the tax is 3.8% of the lesser of: (1) undistributed net investment income or (2) the excess of AGI over the dollar amount at which the highest income tax bracket applicable to an estate or trust begins.
Exceptions and special rules.
The tax does not apply to a nonresident alien or to a trust all the unexpired interests in which are devoted to charitable purposes, a trust that is exempt from tax under, or a charitable remainder trust exempt from tax under Code Sec. 664. The tax is subject to the individual estimated tax provisions and is not deductible in computing any tax imposed by subtitle A of the Code (relating to income taxes).
Net investment income. For purposes of the Medicare contribution tax, “net investment income” means the excess, if any, of:
gross income from interest, dividends, annuities, royalties, and rents, unless those items are derived in the ordinary course of a trade or business to which the Medicare contribution tax doesn’t apply (see below),
other gross income derived from a trade or business to which the Medicare contribution tax applies (below),
net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property other than property held in a trade or business to which the Medicare contribution tax doesn’t apply, over
A taxpayer expecting to realize a gain on a principal residence substantially in excess of the applicable $250,000/$500,000 limit who is planning to sell in a few years should try to complete the sale before 2013 when the 3.8% tax first applies.
Doing so rather than selling after 2012 will remove the portion of the gain that doesn’t qualify for the Code Sec. 121 exclusion from the reach of the 3.8% tax. For example, a married couple with an $800,000 gain could save $11,400 ($300,000 × .038). Likewise, completing a planned sale of a highly appreciated second home before 2013 could also save the 3.8% tax that could be triggered if the sale took place after 2012.
Placing a greater portion of one’s investment funds into tax-exempt bonds after 2012 may help to reduce the taxpayers’ exposure to the 3.8% tax. Of course, this should be done with due regard to income needs and investment considerations.
It should be borne in mind that the 3.8% tax is in addition to any regular tax or capital gains tax that may be imposed on the investment income item. Because higher income taxpayers may face increased regular taxes and capital gains taxes in the next few years, reducing the 3.8% tax takes on increased importance.
Trades and businesses to which tax applies.
The Medicare contribution tax applies to a trade or business if it is a passive activity of the taxpayer, or a trade or business of trading in financial instruments or commodities. For a taxpayer that does engage in a passive activity or a financial instrument or commodities trading business, “net investment income” will include the above items, plus the gross income (minus allocable deductions) from the passive activity or trading business. The tax doesn’t apply to other trades or businesses conducted by a sole proprietor, partnership, or S corporation. But income, gain, or loss on working capital isn’t treated as derived from a trade or business and thus is subject to the tax.
Exception for certain active interests in partnerships and S corporations.
Gain from a disposition of an interest in a partnership or S corporation is taken into account as net investment income only to the extent of the net gain that the transferor would take into account if the partnership or S corporation had sold all its property for fair market value immediately before the disposition.
A similar rule applies to a loss from a disposition of an interest in a partnership or S corporation. Thus, only net gain or loss attributable to property held by the entity that isn’t property attributable to an active trade or business is taken into account.
Retirement plan distributions.
Investment income doesn’t include distributions from tax-favored retirement plans, such as qualified employer plans and IRAs. While distributions from qualifying tax favored retirement plans are not investment income for purposes of the 3.8% tax, depending on the type of vehicle and the taxpayer’s basis in it, they could be included in MAGI and thus help to push the taxpayer over the threshold thus causing other types of investment income to be subject to the tax. This may be a reason not to defer a taxpayer’s first required minimum distribution (RMD) from a qualified plan or IRA to Apr. 1 of the succeeding year if the succeeding year is after 2012 when the 3.8% tax applies.
An individual who has the means but is not contributing the maximum permissible amount to 401(k) plan or IRA should do so rather than invest the difference in a regular investment account. Not only will the individual get the income tax advantages of the qualified plan or IRA for the additional contributed amounts but, in the future, he or she may save some 3.8% tax that could have been triggered had the funds been invested in a regular investment account.
The 3.8% Medicare tax makes Roth IRAs look like a more attractive alternative for higher income individuals. Qualified distributions from Roth IRAs are tax-free and thus won’t be included in MAGI, or be subject to theMedicare tax, whereas distributions from regular IRAs (except to the extent of after-tax contributions) will be included in MAGI - but won’t be subject to the Medicare tax.
Taxpayers thinking of rolling over regular IRAs to Roth IRAs should do so before 2013 to avoid winding up with higher MAGI as a result of the rollover. And for IRA-to-Roth-IRA conversions occurring in 2010, unless a taxpayer elects otherwise, none of the gross income from the conversion is included in income this year; half of the income resulting from the conversion will be includible in gross income in 2011 and the other half in 2012.
Amounts subject to SECA taxes.
Investment income does not include amounts subject to SECA taxes.
]]>Now that the worst is over economically (we hope), it may be a good time to wrestle back control of your inventory. Here are three ways to get off the mat.
Check your math
Getting the upper hand on inventory is essentially one part mathematics and another part strategic planning. You need to have accurate inventory counts as well as the controls in place to regulate quality and keep things moving.
As is true for so much in business, timing is everything. Companies need raw materials and key components in place before starting a production run, but they don’t want to bring them in too soon or else they’ll suffer excess costs. The same holds true for finished products — you need enough on hand to fulfill sales without over- or understocking.
If you’re struggling in this area, it may be time to reevaluate your counting process. One alternative to consider is cycle counting. This process involves taking a weekly or monthly physical count of part of your warehoused inventory.
These physical counts are then compared against the levels shown on your inventory management system.
The idea here is to drill down and pinpoint as many inventory discrepancies as possible. By identifying the source of accuracy problems, you can figure out the best solutions. Of course, you can’t conduct cycle counting once and expect a cure-all. You’ll need to use it regularly to start eliminating your inventory accuracy problems.
Use technology
With all this data flying around, you need the right tools to gather, process and store it. So investing in a good inventory software system (or upgrading the one you have) is key. As the saying goes, “garbage in, garbage out” — imprecise information coming from your current system could be leading to all of those write-offs, inflated costs, missed sales and lost profits.
As always, you get what you pay for: Investing in a new software system and then paying ongoing maintenance fees (which are usually recommended to keep it running smoothly) could seem like a bitter pill to swallow. But, in the long run, strong inventory management can pay for itself.
Another way to use technology for inventory purposes is as a communication tool. Knowing which products are hot and which are not will go a long way toward developing correct purchasing and stocking levels.
Consider using online surveys, e-mail contests and even social networking (such as a Facebook page) to keep in touch with customers and gather this information.
Take desperate measures (if you must)
For businesses with severe excess inventory problems, desperate measures are sometimes the only way out. You may be able to sell the overage at a discount to a liquidator or scrap dealer.
If you’ve sold at a loss, you can deduct the excess of your cost basis over the sales price on your income tax return. To be eligible for the deduction, however, the sale must be “bona fide” — you can’t hedge your bets by retaining the right to buy the inventory back at a discount.
You also could donate some inventory to charity. Ordinarily, your charitable deduction is limited to the property’s cost basis (or, if less, the property’s market value). C corporations, however, may be able to qualify for an enhanced deduction if the donation is intended for the ill, the needy or children. The deduction is limited to the inventory’s cost basis plus 50% of any appreciation in value (but no more than 200% of cost). It’s also subject to general limits on charitable deductions.
Ignoring and improving
In a time when cash flow has never been more important, an improperly or inadequately managed inventory system can drag down your revenues. Make sure you’re not ignoring the items on your shelves while trying to improve the numbers at your bottom line.
Two primary inventory accounting methods
Generally, there are two primary inventory accounting methods for both tax accounting and financial accounting. They are:
Last in, first out (LIFO). If you tend to retain inventory items (such as repair parts or durable goods) for long periods, LIFO may always be your best choice. It allows you to allocate the most recent (and, therefore, higher) costs first, ideally maximizing your cost of goods sold and minimizing your taxable income.
First in, first out (FIFO). This refers to selling the oldest stock first. Generally, FIFO works best with dated goods, perishable items and collectibles. In an inflationary market, this approach usually results in higher income as older purchases with lower costs are included in cost of sales. (In a deflationary market, the opposite generally holds true.)
Of the two, FIFO is used more often because it more genuinely reflects the typical normal flow of goods and is easier to account for than LIFO, which can be highly complex and deals with inventory costs (not the actual inventory) that may be many years old.
If you’re dissatisfied with your company’s method, you may be able to change it. But doing so is far from simple. Should a business wish to change its inventory accounting method for tax purposes, it needs to request permission from the IRS. And if it wishes to change for financial accounting purposes, it needs a valid reason. This is why changes in accounting for inventory are rarely seen.
]]>All of this uncertainty may leave you asking, “What’s become of estate planning?”
2010: Potential dangers
On its face, the estate tax repeal may seem like a good thing. But if you die while there’s no estate tax, your estate plan may not operate as intended. Like many plans, yours may call for a marital trust (for the benefit of your spouse) and a family trust (for the benefit of your children or other loved ones). Furthermore, your plan may contain a formula that automatically allocates the amount that’s exempt from estate tax to the family trust with the balance going to the marital trust.
If there’s no estate tax, a formula like this may channel all your assets into the family trust — essentially disinheriting your spouse. What’s worse, you may create significant state estate tax liability, depending on how your state tax laws work.
The good news is that you can add an amendment to your estate plan that guards against this circumstance. Another danger is the change in the step-up in basis rules, which could cause your heirs to incur significant income tax liability if they inherit highly appreciated assets during the repeal.
2011: Coping strategies
Even if your estate plan escapes 2010 unscathed, you still have 2011 to contend with. As mentioned, sizable estate and GST taxes will return, but that’s not all: The gift tax also will increase to a top rate of 55% (from 35% in 2010).
In response, one move to consider is maximizing your annual exclusion gifts this year. The exclusion allows you to give up to $13,000 ($26,000 for married couples) to any number of recipients free of transfer taxes. And it likely won’t be affected by forthcoming legislation.
Also consider making taxable gifts while the tax rate is only 35% and making gifts to your grandchildren while there’s no GST tax in effect. But be aware that these moves could prove costly should Congress retroactively increase the gift tax rate and reinstate the GST tax.
Hard to say
Because it’s hard to say what will become of estate tax and its related provisions or when Congress might take action (it may even have done so by the time you’re reading this article), check with your tax advisor for the latest developments.
]]>If you’re considering offering a telecommuting option to some or all of your employees, you may need to sell the idea to your business partners or managers. Or perhaps you’re hesitant yourself and need some convincing. In either case, here are some points for making the case to join this increasingly popular employment arrangement.
Cost savings
First things first: the money. Where do the cost savings lie in telecommuting arrangements? For starters, when timed correctly, offering a significant segment of your workforce the option to telecommute can cut overhead expenses — in some cases, dramatically.
For example, if your office lease will soon be up, by allowing part of your staff to telecommute you may be able to move to a considerably smaller space. After all, you won’t need private offices or cubicles for these employees. You might save on parking, office equipment and supplies as well.
You could also boost productivity and lower operating costs. How? A telecommuting arrangement challenges a supervisor to focus on objectives and results and often bypasses or curtails “how to” disagreements and personality conflicts. Thus, you may be able to get better results from workers who prefer to work independently.
Another source of savings could lie in lower hiring and retention costs. For good reason, environmentally friendly business policies are all the rage. Getting the word out that telecommuting is an option could bring you top-tier job candidates who are looking to diminish their carbon footprints. In addition, you may avoid hiring costs altogether by retaining key employees with similar values.
Prime positions
You may need to build a case for why certain positions are better suited to telecommuting than others. Salespeople, nonsupport IT staff (such as Web designers), and editors and proofreaders are all typically good candidates for telecommuting arrangements. Your rationale for a telecommuting option should include the projected budgetary savings you’re shooting for.
You also may have to invest in some technology upgrades and spend a little more time ensuring that your company’s sensitive data won’t be threatened by outside workers logging in to your network. Fortunately, with personal computers and home Internet access so pervasive, it’s likely never been easier for workers to telecommute than it is right now.
*The risks
Naturally, there are cost risks to telecommuting as well. Even though a boost in productivity is a possible eventual benefit, you may have to suffer through a temporary productivity setback while your workforce adjusts to the new wrinkles that telecommuting would present.
Also beware of an “us” against “them” mentality developing between in-office workers and telecommuters. To prevent this, include telecommuting staffers in companywide e-mail announcements and invite them to meetings or events held at (or outside) the office — even if you think they won’t be able to attend. Just because they work from home doesn’t mean these workers shouldn’t be a part of the office environment.
The tax implications of an employee working out of state represent another, often little-discussed risk. Many states need money and may impose state income tax on the earnings of out-of-state telecommuters because those workers are earning compensation in state. Also be aware that states may assess employment taxes, as well as business income taxes, on employers.
Ongoing debate
There probably will always be an ongoing debate about telecommuting. And neither side will likely ever be completely wrong or right. Some companies — manufacturers, for instance — may have few if any employees who can work from home. But as the technology involved becomes more pervasive and less expensive, the telecommuting option is one every company should at least consider for certain positions.
]]>This expanded health care tax benefit applies to various workplace and retiree health plans. It also applies to self-employed individuals who qualify for the self-employed health insurance deduction on their federal income tax return.
Employees who have children who will not have reached age 27 by the end of the year are eligible for the new tax benefit from March 30, 2010, forward, if the children are already covered under the employer’s plan or are added to the employer’s plan at any time. For this purpose, a child includes a son, daughter, stepchild, adopted child or eligible foster child.
This new age 27 standard replaces the lower age limits that applied under prior tax law, as well as the requirement that a child generally qualify as a dependent for tax purposes.
The notice says that employers with cafeteria plans may permit employees to immediately make pre-tax salary reduction contributions to provide coverage for children under age 27, even if the cafeteria plan has not yet been amended to cover these individuals. Plan sponsors then have until the end of 2010 to amend their cafeteria plan language to incorporate this change.
In addition to changing the tax rules as described above, the Affordable Care Act also requires plans that provide dependent coverage of children to continue to make the coverage available for an adult child until the child turns age 26. The extended coverage must be provided not later than plan years beginning on or after Sept. 23, 2010. The favorable tax treatment described in the notice applies to that extended coverage. For more information, please contact your tax advisor.
]]>Representing a sweeping overhaul of the U.S. health care system, the Patient Protection and Affordable Care Act was signed into law on March 23. Here’s a brief summary of the main tax provisions affecting individuals and businesses. If you have any questions about how this may impact you or your business, please contact your tax advisor.
Individual mandate. The new law contains an “individual mandate”—a requirement that U.S. citizens and legal residents have qualifying health coverage or be subject to a tax penalty. Under the new law, those without qualifying health coverage will pay a tax penalty of the greater of: (a) $695 per year, up to a maximum of three times that amount ($2,085) per family, or (b) 2.5% of household income over the threshold amount of income required for income tax return filing. The penalty will be phased in according to the following schedule: $95 in 2014, $325 in 2015, and $695 in 2016 for the flat fee or 1.0% of taxable income in 2014, 2.0% of taxable income in 2015, and 2.5% of taxable income in 2016.
Beginning after 2016, the penalty will be increased annually by a cost-of-living adjustment. Exemptions will be granted for financial hardship, religious objections, American Indians, those without coverage for less than three months, aliens not lawfully present in the U.S., incarcerated individuals, those for whom the lowest cost plan option exceeds 8% of household income, those with incomes below the tax filing threshold (in 2010 the threshold for taxpayers under age 65 is $9,350 for singles and $18,700 for couples), and those residing outside of the U.S.
Premium assistance tax credits for purchasing health insurance. The centerpiece of the health care legislation is its provision of tax credits to low- and middle-income individuals and families for the purchase of health insurance. For tax years ending after 2013, the new law creates a refundable tax credit (the “premium assistance credit”) for eligible individuals and families who purchase health insurance through an exchange.
The premium assistance credit, which is refundable and payable in advance directly to the insurer, subsidizes the purchase of certain health insurance plans through an exchange. Under the provision, an eligible individual enrolls in a plan offered through an exchange and reports his or her income to the exchange. Based on the information provided to the exchange, the individual receives a premium assistance credit based on income and IRS pays the premium assistance credit amount directly to the insurance plan in which the individual is enrolled. The individual then pays to the plan in which he or she is enrolled the dollar difference between the premium assistance credit amount and the total premium charged for the plan.
For employed individuals who purchase health insurance through an exchange, the premium payments are made through payroll deductions.
The premium assistance credit will be available for individuals and families with incomes up to 400% of the federal poverty level ($43,320 for an individual or $88,200 for a family of four, using 2009 poverty level figures) that are not eligible for Medicaid, employer sponsored insurance, or other acceptable coverage. The credits will be available on a sliding scale basis. The amount of the credit will be based on the percentage of income the cost of premiums represents, rising from 2% of income for those at 100% of the federal poverty level for the family size involved to 9.5% of income for those at 400% of the federal poverty level for the family size involved.
Higher Medicare taxes on high-income taxpayers. High-income taxpayers will be hit with a double whammy: a tax increase on wages and a new levy on investments.
Higher Medicare payroll tax on wages. The Medicare payroll tax is the primary source of financing for Medicare's hospital insurance trust fund, which pays hospital bills for beneficiaries, who are 65 and older or disabled. Under current law, wages are subject to a 2.9% Medicare payroll tax. Workers and employers pay 1.45% each.
Self-employed people pay both halves of the tax (but are allowed to deduct half of this amount for income tax purposes). Unlike the payroll tax for Social Security, which applies to earnings up to an annual ceiling ($106,800 for 2010), the Medicare tax is levied on all of a worker's wages without limit.
Under the provisions of the new law, which take in 2013, most taxpayers will continue to pay the 1.45% Medicare hospital insurance tax, but single people earning more than $200,0000 and married couples earning more than $250,000 will be taxed at an additional 0.9% (2.35% in total) on the excess over those base amounts.
Employers will collect the extra 0.9% on wages exceeding $200,000 just as they would withhold Medicare taxes and remit them to the IRS. Companies wouldn't be responsible for determining whether a worker's combined income with his or her spouse made them subject to the tax. Instead, some employees will have to remit additional Medicare taxes when they file income tax returns, and some will get a tax credit for amounts overpaid.
Self-employed persons will pay 3.8% on earnings over the threshold. Married couples with combined incomes approaching $250,000 will have to keep tabs on their spouses' pay to avoid an unexpected tax bill. It should also be noted that the $200,000/$250,000 thresholds are not indexed for inflation, so it is likely that more and more people will be subject to the higher taxes in coming years.
Medicare payroll tax extended to investments. Under current law, the Medicare payroll tax only applies to wages. Beginning in 2013, a Medicare tax will, for the first time, be applied to investment income. A new 3.8% tax will be imposed on net investment income of single taxpayers with AGI above $200,000 and joint filers over $250,000 (unindexed). Net investment income is interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than property held in a trade or business). Net investment income is reduced by properly allocable deductions to such income.
However, the new tax won't apply to income in tax-deferred retirement accounts such as 401(k) plans. Also, the new tax will apply only to income in excess of the $200,000/$250,000 thresholds. So if a couple earns $200,000 in wages and $100,000 in capital gains, $50,000 will be subject to the new tax.
Because the new tax on investment income won't take effect for three years, that leaves more time for Congress and the IRS to tinker with it. So we can expect lots of refinements and “clarifications” between now and when the tax is actually rolled out in 2013.
Floor on medical expenses deduction raised from 7.5% of adjusted gross income (AGI) to 10%. Under current law, taxpayers can take an itemized deduction for unreimbursed medical expenses for regular income tax purposes only to the extent that those expenses exceed 7.5% of the taxpayer's AGI. The new law raises the floor beneath itemized medical expense deductions from 7.5% of AGI to 10%, effective for tax years beginning after Dec. 31, 2012. The AGI floor for individuals age 65 and older (and their spouses) will remain unchanged at 7.5% through 2016.
Limit reimbursement of over-the-counter medications from HSAs, FSAs, and MSAs. The new law excludes the costs for over-the-counter drugs not prescribed by a doctor from being reimbursed through a health reimbursement account (HRA) or health flexible savings accounts (FSAs) and from being reimbursed on a tax-free basis through a health savings account (HSA) or Archer Medical Savings Account (MSA), effective for tax years beginning after Dec. 31, 2010.
Increased penalties on nonqualified distributions from HSAs and Archer MSAs. The new law increases the tax on distributions from a health savings account or an Archer MSA that are not used for qualified medical expenses to 20% (from 10% for HSAs and from 15% for Archer MSAs) of the disbursed amount, effective for distributions made after Dec. 31, 2010.
Limit health flexible spending arrangements (FSAs) to $2,500. An FSA is one of a number of tax-advantaged financial accounts that can be set up through a cafeteria plan of an employer. An FSA allows an employee to set aside a portion of his or her earnings to pay for qualified expenses as established in the cafeteria plan, most commonly for medical expenses but often for dependent care or other expenses.
Under current law, there is no limit on the amount of contributions to an FSA. Under the new law, however, allowable contributions to health FSAs will capped at $2,500 per year, effective for tax years beginning after Dec. 31, 2012. The dollar amount will be indexed for inflation after 2013.
Dependent coverage in employer health plans. Effective on the enactment date, the new law extends the general exclusion for reimbursements for medical care expenses under an employer-provided accident or health plan to any child of an employee who has not attained age 27 as of the end of the tax year. This change is also intended to apply to the exclusion for employer-provided coverage under an accident or health plan for injuries or sickness for such a child. A parallel change is made for VEBAs and 401(h) accounts. Also, self-employed individuals are permitted to take a deduction for the health insurance costs of any child of the taxpayer who has not attained age 27 as of the end of the tax year.
Excise tax on indoor tanning services. The new law imposes a 10% excise tax on indoor tanning services. The tax, which will be paid by the individual on whom the tanning services are performed but collected and remitted by the person receiving payment for the tanning services, will take effect July 1, 2010.
Liberalized adoption credit and adoption assistance rules. For tax years beginning after Dec. 31, 2009, the adoption tax credit is increased by $1,000, made refundable, and extended through 2011 The adoption assistance exclusion is also increased by $1,000.
Tax Changes Affecting Small Business in the 2010 Health Reform Legislation
For owners of small businesses and their workers, the recently enacted health reform legislation has some key provisions to pay attention to. The major ones include: tax credits; excise taxes; and penalties. But whether a business will be affected by them depends on a variety of factors, such as the number of employees the business has.
Tax credits to certain small employers that provide insurance. The new law provides small employers with a tax credit (i.e., a dollar-for-dollar reduction in tax) for non-elective contributions to purchase health insurance for their employees. The credit can offset an employer's regular tax or its alternative minimum tax (AMT) liability.
Small business employers eligible for the credit. To qualify, a business must offer health insurance to its employees as part of their compensation and contribute at least half the total premium cost. The business must have no more than 25 full-time equivalent employees (“FTEs”), and the employees must have annual full-time equivalent wages that average no more than $50,000. However, the full amount of the credit is available only to an employer with 10 or fewer FTEs and whose employees have average annual full-time equivalent wages from the employer of less than $25,000.
Years the credit is available. The credit is initially available for any tax year beginning in 2010, 2011, 2012, or 2013. Qualifying health insurance for claiming the credit for this first phase of the credit is health insurance coverage purchased from an insurance company licensed under state law. For tax years beginning after 2013, the credit is only available to an eligible small employer that purchases health insurance coverage for its employees through a state exchange and is only available for two years. The maximum two-year coverage period does not take into account any tax years beginning in years before 2014. Thus, an eligible small employer could potentially qualify for this credit for six tax years, four years under the first phase and two years under the second phase.
Calculating the amount of the credit. For tax years beginning in 2010, 2011, 2012, or 2013, the credit is generally 35% (50% for tax years beginning after 2013) of the employer's non-elective contributions toward the employees' health insurance premiums. The credit phases out as firm-size and average wages increase. Tax-exempt small businesses meeting these requirements are eligible for payroll tax credits of up to 25% for tax years beginning in 2010, 2011, 2012, or 2013 (35% in tax years beginning after 2013) of the employer's non-elective contributions toward the employees' health insurance premiums.
Special rules. The employer is entitled to an ordinary and necessary business expense deduction equal to the amount of the employer contribution minus the dollar amount of the credit. For example, if an eligible small employer pays 100% of the cost of its employees' health insurance coverage and the amount of the tax credit is 50% of that cost (i.e., in tax years beginning after 2013), the employer can claim a deduction for the other 50% of the premium cost. Self-employed individuals, including partners and sole proprietors, two percent shareholders of an S corporation, and five percent owners of the employer are not treated as employees for purposes of this credit. Any employee with respect to a self-employed individual is not an employee of the employer for purposes of this credit if the employee is not performing services in the trade or business of the employer. Thus, the credit is not available for a domestic employee of a sole proprietor of a business. There is also a special rule to prevent sole proprietorships from receiving the credit for the owner and their family members. Thus, no credit is available for any contribution to the purchase of health insurance for these individuals and the individual is not taken into account in determining the number of full-time equivalent employees or average full-time equivalent wages.
Most small businesses exempted from penalties for not offering coverage to their employees. Although the new law imposes penalties on certain businesses for not providing coverage to their employees (so-called “pay or play”), most small businesses won't have to worry about this provision because employers with fewer than 50 employees aren't subject to the “pay or play” penalty.
For businesses with at least 50 employees, the possible penalties vary depending on whether or not the employer offers health insurance to its employees. If it does not offer coverage and it has at least one full-time employee who receives a premium tax credit, the business will be assessed a fee of $2,000 per full-time employee, excluding the first 30 employees from the assessment.
So, for example, an employer with 51 employees who doesn't offer health insurance to his employees will be subject to a penalty of $42,000 ($2,000 multiplied by 21). Employers with at least 50 employees that offer coverage but have at least one full-time employee receiving a premium tax credit will pay $3,000 for each employee receiving a premium credit (capped at the amount of the penalty that the employer would have been assessed for a failure to provide coverage, or $2,000 multiplied by the number of its full-time employees in excess of 30). These provisions take effect Jan. 1, 2014.
The “Cadillac tax” on high-cost health plans. The new law places an excise tax on high-cost employer-sponsored health coverage (often referred to as “Cadillac” health plans). This is a 40% excise tax on insurance companies, based on premiums that exceed certain amounts. The tax is not on employers themselves unless they are self-funded (this typically occurs at larger firms). However, it is expected that employers and workers will ultimately bear this tax in the form of higher premiums passed on by insurers.
Here are the specifics: The new tax, which applies for tax years beginning after Dec. 31, 2017, places a 40% nondeductible excise tax on insurance companies and plan administrators for any health coverage plan to the extent that the annual premium exceeds $10,200 for single coverage and $27,500 for family coverage. An additional threshold amount of $1,650 for single coverage and $3,450 for family coverage will apply for retired individuals age 55 and older and for plans that cover employees engaged in high risk professions.
The tax will apply to self-insured plans and plans sold in the group market, but not to plans sold in the individual market (except for coverage eligible for the deduction for self-employed individuals). Stand-alone dental and vision plans will be disregarded in applying the tax. The dollar amount thresholds will be automatically increased if the inflation rate for group medical premiums between 2010 and 2018 is higher than the Congressional Budget Office (CBO) estimates in 2010.
Employers with age and gender demographics that result in higher premiums could value the coverage provided to employees using the rates that would apply using a national risk pool. The excise tax will be levied at the insurer level. Employers will be required to aggregate the coverage subject to the limit and issue information returns for insurers indicating the amount subject to the excise tax.
Employer Requirement to Offer Coverage in the 2010 Health Reform Legislation
The recently enacted health overhaul legislation requires certain employers to offer and contribute to their workers' health insurance or pay a penalty. Under the new law, effective for months beginning after Dec. 31, 2013, a large employer that does not offer coverage for all its full-time employees, offers minimum essential coverage that is unaffordable, or offers minimum essential coverage that consists of a plan under which the plan's share of the total allowed cost of benefits is less than 60%, is required to pay a penalty if any full-time employee is certified to the employer as having purchased health insurance through a state exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee. Here are the details:
Who is subject to the employer mandate? Only an “applicable large employer,” defined as someone who employed an average of at least 50 full-time employees during the preceding calendar year, is subject to the requirement to offer coverage. Most small businesses, since they have fewer than 50 employees, are thus exempt from the employer requirement. In counting the number of employees for purposes of determining whether an employer is an applicable large employer, a full-time employee (meaning, for any month, an employee working an average of at least 30 hours or more each week) is counted as one employee and all other employees are counted on a pro-rated basis.
However, even an employer with 50 or more employees isn't subject to the penalty for not offering coverage if the employer doesn't have any full-time employees who are certified to the employer as having purchased health insurance through a state exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee. In other words, if an employer doesn't have any full-time employees who have a lower income that might qualify him or her to receive a subsidy when purchasing a health plan in the proposed health insurance exchange, the employer will not pay a “pay or play” penalty.
Penalty for employers not offering coverage. An applicable large employer who fails to offer its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an employer-sponsored plan for any month is subject to a penalty if at least one of its full-time employees is certified to the employer as having enrolled in health insurance coverage purchased through a state exchange with respect to which a premium tax credit or cost-sharing reduction is allowed or paid to the employee.
The penalty for any month is an excise tax equal to the number of full-time employees over a 30-employee threshold during the applicable month (regardless of how many employees are receiving a premium tax credit or cost-sharing reduction) multiplied by one-twelfth of $2,000.
For example, if an employer fails to offer minimum essential coverage and has 60 full-time employes, ten of whom receive a tax credit for the year for enrolling in a state exchange-offered plan, the employer will owe $2,000 for each employee over the 30-employee threshold, for a total penalty of $60,000 ($2,000 multiplied by 30 (60 minus 30)). This penalty is assessed on a monthly basis.
Penalty for employers that offer coverage but have at least one employee receiving a premium tax credit. An applicable large employer who offers coverage but has at least one full-time employee receiving a premium tax credit or cost-sharing reduction is subject to a penalty. The penalty is an excise tax that is imposed for each employee who receives a premium tax credit or cost-sharing reduction for health insurance purchased through a state exchange.
For each full-time employee receiving a premium tax credit or cost-sharing subsidy through a state exchange for any month, the employer is required to pay an amount equal to one-twelfth of $3,000. The penalty for each employer for any month is capped at an amount equal to the number of full-time employees during the month (regardless of how many employees are receiving a premium tax credit or cost-sharing reduction) in excess of 30, multiplied by one-twelfth of $2,000.
For example, if an employer offers health coverage and has 60 full-time employees, 15 of whom receive a tax credit for the year for enrolling in a state exchange-offered plan, the employer will owe a penalty of $3,000 for each employee receiving a tax credit, for a total penalty of $45,000. The maximum penalty for this employer is capped at the amount of the penalty that it would have been assessed for a failure to provide coverage, or $60,000 ($2,000 multiplied by 30 (60 minus 30)). Since the calculated penalty of $45,000 is less than the maximum amount, the employer pays the $45,000 calculated penalty. This penalty is assessed on a monthly basis.
Requirement to offer “free choice vouchers.” After 2013, employers offering minimum essential coverage through an eligible employer-sponsored plan and paying a portion of that coverage will have to provide qualified employees with a voucher whose value could be applied to purchase of a health plan through the Insurance Exchange. Qualified employees would be those employees: who do not participate in the employer's health plan; whose required contribution for employer sponsored minimum essential coverage exceeds 8%, but does not exceed 9.8% of household income; and whose total household income does not exceed 400% of the poverty line for the family. The value of the voucher would be equal to the dollar value of the employer contribution to the employer offered health plan. Employers providing free choice vouchers will not be subject to penalties for employees that receive a voucher.
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