CBO Thinks Small Businesses Are Giving Up $20 Billion in Health Insurance Tax Credits

And it’s yet another year where we’re astounded by how many small businesses are not taking the small business health insurance tax credits.  How much small businesses giving up in tax credits?  The Congressional Budget Office is estimating that small businesses are giving up $20 billion in health insurance tax credits over the next ten years.

Under healthcare reform, a small business may claim a federal tax credit worth up to 35 percent of what the business spends on health insurance for its employees. To qualify for the tax credits under healthcare reform, a small business must have fewer than 25 full-time employees, have average annual wages of $50,000 or less, and cover at least 50 percent of the cost of healthcare for its employees. The tax credits are calculated on a sliding scale, with the full 35 percent credit going to small businesses with 10 or fewer full-time employees and average annual salaries of $25,000 or less.

Unfortunately, it’s turned into an accounting headscratcher for a lot of small businesses, many of whom seem to have concluded that it’s not worth the trouble:

Until Thursday, Wendle had no idea his Philipsburg, Pa., company could receive thousands from the credit. He’d previously explored the option but gave up, deciding the company was too large.

It wasn’t.

Part-time employees are counted differently than full-timers, and owners aren’t included, bringing his number just below the 25-employee threshold. Wendle now estimates the credit might cut his tax bill by $2,500.

“Trying to figure this out could take me three days,” he said. “If politicians wanted to take care of small businesses, they should just reduce tax rates across the board.”

Another problem is that most tax preparers overlook the credit, because it’s not even in their software, said Simon Gray, an Atlanta accountant who works closely with tech start-ups and medical firms.

And then there are people like Kim Williams, who until recently didn’t even know the credit existed. The vice president of operations at jeweler Edward J. & Co., found out her Lancaster, Pa., company could claim thousands from the credit.

“That’s a part-time employee,” she said. “That’s three more computers.”

The general reluctance to apply for the program was noted in the CBO’s report last week, which explained “small businesses have been slower to take advantage of the credits than originally estimated.”

The health care tax credit few are taking

If you’re thinking of taking the small business health insurance tax credit, don’t forget:

What’s a Full-Time Employee? This should be a simple question, but it’s not. In figuring out how many full-time employees you have, you need to figure out your full-time equivalents (FTEs) which depends on the number of hours, days or weeks worked by all of your employees during the year. The number to keep in mind is 2,080 hours which counts as one FTE. Any combination of employees working an equivalent of 2,080 hours during the year is one FTE. For example, four employees each working 20 hours a week for six months of the year, you count the four as one FTE (four employees times 20 hours times 26 weeks equals 2,080 hours).

Wages. In figuring out your average wages, remember that wages include all wages earned by your employees during the tax year, including vacation, sick days, bonus and commissions. To reach your average, take those total wages and divide by your number of FTEs (not your total number of employees). Don’t forget, you get to round down to the nearest $1,000.

Family Members. Family members of a business owner or a business owner’s partner cannot be counted in the calculation of tax credits. More importantly, a family member’s hours, wages and health insurance premiums cannot be counted in the tax credit calculation, so a small business that mainly employs family members will likely only receive a small fraction of the tax credits it would receive if it employed mainly non-family members.

Small Business Health Insurance Tax Credit Worksheet. Believe if or not, the Internal Revenue Service (IRS) is actually trying to help small businesses plan out how much they may be eligible for in health insurance tax credits on their website, though. The IRS has provided small business with a nifty worksheet to help calculate their tax credits on their website, and we think it’s worth taking a look at if you’re planning to use the tax credits this year: IRS Small Business Health Insurance Tax Credit Worksheet

Are you planning on using the small business health insurance tax credit? Tell us about it in the MyHealthCafe.com Forums.

Related posts:

1. Healthcare Reform: Will Small Family Businesses Be Eligible for Health Insurance Tax Credits?
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3. Healthcare Reform: Small Businesses Employing Estimated 16.6 Million May Be Eligible For Health Insurance Tax Credits
4. Tax Season Review: The Small Business Health Insurance Tax Credit
5. Tax Season Review: The Small Business Health Insurance Tax Credit