Tax Issues in 2010 and Healthcare Credits

Guess what my friends; a new tax law is upon us once again. What seems frustrating for some is but another day at the office for those of us in the business of looking out for new tax laws.

For 2010, there is no Federal Estate Tax but keep in mind that it returns in 2011 with a reduced exemption in the amount of $1 million. It would be advisable to make sure that your estate plan is current. The year 2010 is also the year for converting traditional IRA's to Roth IRA's. Should you or shouldn't you is always the question that needs to be answered. As always with tax and financial planning, the decision depends on many factors (see my article:"Converting Traditional IRA's to Roth IRA's").

Also in 2010, there is a new credit for small employers providing healthcare to its employees. The credit is available to "for profit businesses" as well as for tax exempt entities. The credit to be taken by the for profits is part of the general business credit which makes it subject to income tax due as well as the alternative minimum tax limitations. The credit is calculated by multiplying the lesser of employer provided insurance premiums or the premium limits established by the Health and Human Services Secretary, by 35%. The credit is allowed to the extent that the business' average compensation is not greater than $50,000.

In fact, the credit is phased-out between $25,000 and $50,000. In addition, the small employer begins a credit phase out between 10 and 25 employees. It is important to note that 5% or more owners of corporations, and 2% or more owners of subchapter S corporations, do not count in the average salary and number of employees computation. In addition, in order to calculate the number o fulltime equivalent employees (FTE's), the entity divides the total number of hours worked by employees (not including the employee group excluded from the calculation mentioned above) by 2,080 hours.

If there are 15 employees working 25,000 hours in 2010, the calculated number of FTE's would be 12. What about looking at an example? Suppose that the employer pays 80% of the cost of insurance for employees. The premiums at 80% for 2010 are $20,000. This just happens to agree with HHS' assessment of premiums for 2010. The average salary for the 15 employees for 2010 is $30,000 (again, not including the employee owner groups mentioned above). The raw credit calculation is $7,000 ($20,000 times 35%). The phase out of the credit is as follows:

$7,000 x 2/12 for number of employees $1,167
$7,000 x $5,000/$25,000 for average wages $1,400
The total credit is then reduced to $4,433 ($7,000-$2,567).
Are we done yet; of course not? Remember, this credit is part of the general business credit and is subject to those limitations as well.

The credit for 2010 through 2013 is 35%. It is raised to 50% after 2013. For tax exempt entities, the credit is calculated the same way. However, the credit percentage is 25% for 2010 through 2013 (as opposed to 35%) and 35% after 2013 (as opposed to 50%). The phase out rules are the same as for profit businesses. From our previous example, the credit is $3,167 ($5,000-$1,833) after substituting 25% for 35%. The good news is that the credit is refundable; which means the rules of the general business credit do not apply.

The tax exempt entity is however, faced to deal with a limitation. This limitation is based on the amount of payroll taxes (federal withholding taxes, plus Medicare tax withheld, and the matching Medicare paid by the employer). If the payroll tax limitation is calculated to be $28,050, the entire credit of $3,167 can be taken. Presumably, IRS will be devising a new form 990 to accommodate taking this credit.

Also in 2010, there is a payroll tax holiday for hiring unemployed workers. For qualified workers hired beginning on March 19, 2010 and ending on December 31, 2010, the matching Social Security payment made by employers is suspended (The OASDI tax at 6.2%). This is true for both profit and not for profit entities. The reduction is claimed on the quarterly 941 form.

There is also a credit for hiring unemployed workers providing they have been on your payroll for a 52 week period. This will mean that the credit is not actually available until 2011. The credit is based on the 6.2% QASDI tax not to exceed $1,000 per qualifying employee. If there is one qualifying employee at $30,000 per year, the OASDI would be $1,860 ($30,000 times 6.2%). In this case, the credit is limited to $1,000. The credit is part of the general business credit and subject to those limitations. This rule also applies to tax exempt entities meaning that there must be a tax liability in order for the credit to be taken (990T). This is different from the health insurance credit available to tax exempt entities on a refundable basis.

Well my friends that is the short of it all. Tax planning takes on a new wrinkle as we move from 2010 into 2011. The time to begin tax planning is right now. Remember, you can do whatever you want, but my way is better.

Ron Piner, CPA
Senior Tax Manager
Saggar & Rosenberg, PC
ronp@sr.cpa.pro

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