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Small Business Tax Credits are worth the fuss

March 7, 2011 - Mary Ann Heath
I loathe story problems.

How fast is the train traveling if it left from Chicago and the third freight car has a bushel of apples, two of which are red...

Page 119 of the Patient Protection and Affordable Care Act highlights information on Small Business Tax Credits (SBTC), the contents of which require something akin to working through story problems in order to understand it. Some aspects pertaining to the amount of the SBTC sound a little similar to the problem above.

The good news, regardless of how long it took me to understand (perhaps a full ten minutes worth of reading and scribbling), is they exist. While researching some of the buzz on the credit, I found a lawmaker or two in the state of Michigan complaining about the difficulty of determining eligibility for the credit. If I can do it, those running their own businesses should certainly be able to handle it. It’s a little confusing, but even the IRS has set up a few easy ways of determining whether or not small businesses qualify (and let’s face it, it’s not too often the IRS offers anything helpful).

It wasn’t too long ago I met with a friend for lunch who had been laid off during the economic downturn in 2008. She informed me she finally found a job. Yet, her employer does not offer health care. This could change if her employer checks into the SBTC.

Eligible small businesses may receive a credit that covers up to 35 percent of its premium costs (25 percent for tax-exempt employers) in 2010. On Jan. 1, 2014, this increases to 50 percent (35 for tax exempt companies), with a gradual “phase-out” for firms with wages between $25,000 and $50,000. To be eligible, companies must:

• Cover at least 50 percent of costs associated with health care coverage of its workers.

• Must have less than the equivalent of 25 full-time workers. The IRS sites the example that an employer with fewer than 50 half-time workers could be eligible.

• Have average annual wages between $25,000 and $50,000.

Determining “average annual wages” and equivalent full-time workers is where the story problem comes in (and what some are saying is too confusing). Equivalent full-time workers are determined by dividing the total number of hours of service paid by the employer to employees during the taxable year by 2,080 (which is 40 hours a week for 52 weeks in a year). It’s important to note that for employees working more than 2,080 hours, the excess is not considered. Seasonal workers hours are also not counted. To find the average annual wages you divide the total amount of wages paid by the employer to employees during the taxable year by the number of full-time equivalent employees (the number we just computed). The IRS website has a fact sheet with “Three Simple Steps” to help with the math (you can find a link on the right-hand side of this blog).

According to a Forbes Magazine article, health insurance companies have been reporting a significant increase in the number of small businesses offering health benefits to employees. Sen. Debbie Stabenow noted in a press release that more than 100,000 small businesses in Michigan offer employees health care, as well. The tax credit helps these businesses.

At least one small business owner spoke out on behalf of the new tax credits.

“Healthcare reform has been a job creator at my 100-year-old downtown mom and pop garden store," Mark Hodesh, owner of Downtown Home and Garden in Ann Arbor is quoted as saying in a press release from Stabenow’s office. "The 30 percent tax credit we will receive this year was a Godsend in view of the 300 percent health care cost increase we faced over the past 10 years and gave me the means to hire a new employee last spring. As it turned out, 2010 was our busiest year ever and we wouldn't have been able to handle the increase without the new hire to help. The tax credit not only helped to create a job, it helped our business to grow."

Taxes have never been easy. But, if the most difficult part of SBTC is determining eligibility, isn’t it worth the fuss? I am not a math person. If I can make sense out of the confusing SBTC, than I’m sure many, many others can, too.

Bottom line?

Owning a small business is like buying yourself two full-time jobs that you rarely get paid fairly for. Responsible business owners work tirelessly every day to run as efficiently as possible. Take the time; add this to your list of cost-saving initiatives. You owe it to yourself.

Looking ahead: Next week will be a big week... “Subtitle F—Shared Responsibility For Health Care.” Part I covers “Individual Responsibility”


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