Daunting health care tax credit finds few takers



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The federal health care tax credit for small employers -- part of the Patient Protection and Affordable Care Act designed to help small businesses -- appears not to be helping many businesses at all.In Keene, The Monadnock Conservancy did receive the credit, but it wound up being half the size of the annual increase in the nonprofit organization's health care premiums."It was nice, but it was a drop in the bucket compared to our payroll," said Ryan Owens, director of the conservancy.Up in Hart's Location, The Notchland Inn wasn't able to receive it at all. Although the company offered to pay 80 percent of employees' health care, so few could afford to pay for the rest that only a couple of workers participated, making the company ineligible for the credit."The system is set up to fail," said innkeeper Ed Butler. "The tax credit is not set up to fail."On the national level, only about 14 percent of eligible businesses have taken advantage of the credit, which was instituted in May 2010, and it's no wonder. Almost everything about the program makes it difficult for small businesses to do so -- and for those that do, the payoff is puny."It was a step, but a baby step," said Constance Kincaid-Brown, a Cornish accountant who works with nonprofits, of the credit. "When you see what a low impact it had, you go, 'Wow, we do need to do more.'""The batting average is pretty pitiful -- say less than one out of 40 business clients," said Steve Feinberg, a CPA who owns Appletree Business Services in Londonderry.A complex creditTheoretically, the credit -- which covers up to 35 percent of a business' health care premiums -- should be used by nearly 25,000 eligible businesses in New Hampshire. That should go up to 50 percent in 2014, if federal health reform doesn't get derailed in the future.You would think that few businesses would leave that kind of money on the table. But in reality, the very businesses that could benefit the most are the least likely to take advantage of the credit or benefit from it.For one, it is a complex credit that has so many criteria that it can involve as many as seven separate worksheets.Here are some of the limitations:• It's not enough for a business to be small; it has to have fewer than 10 full-time equivalents to receive the full benefit, and fewer than 25 to receive any at all. So the first math involved is figuring out your FTEs.• A company's employees have to earn an average wage below $25,000 for full benefits ($50,000 for any). Better check the IRS rules on how to figure out the average wage.• The company must pay half of all those employees' premiums in the aggregate, not just 50 percent of those who participate. So if only half of a company's employees are involved, it would have to pay all of the premiums. And certain things don't count toward the credit, like helping employees with deductibles. There are also special rules if you offer more than one health plan.• You can't take the credit on any premiums paid that exceed the state average, lowering the amount of credit most small businesses can take. (Don't worry -- you can look up the state average on the Internal Revenue Service website. There are some exceptions, so blow up the font to read the rules.)• And - perhaps most importantly - the company must make enough money to pay taxes -- a tall order in this recession. Businesses can use the credit in subsequent years, if they can ever figure out the loss carryover deduction.Just because of that last limitation, only 2.6 million of the 4 million firms estimated to be eligible for the credit really could have received it in 2010, according to one study conducted earlier this year for the U.S. Small Business Administration's Office of Advocacy.But, of course, that's only if they even applied for it -- and to apply, a small business first has to hear about it.According to a national survey conducted by the Small Business Majority, a group supportive of health care reform efforts, more than half (57 percent) of businesses surveyed weren't aware of the credit.It isn't that the program hasn't received any publicity. The IRS has sent out 4.4 million postcards and completed 1,000 outreach and education programs. And as one of the few benefits currently available in the controversial health reform legislation, you would think that it would face intense scrutiny.But there hasn't been much focus on the tax break, much to the frustration of the Small Business Majority. And one of the chief purveyors of any education on the tax break - accountants - have been not been doing very much to spread the word, according to John Arensmeyer, the organization's CEO, who didn't buy the argument that accountants - of all people - would shun a tax break just because it's complex, or only helps certain clients."It's a head-scratcher as to why they are so resistant," he said. "It's free money. It's no panacea, but its one additional tool in the arsenal."'A lot of work'Certainly the New Hampshire Society of CPAs isn't jumping at the chance to talk about it.When NHBR asked the society to be referred to accountants familiar about the credit and why small businesses in New Hampshire weren't using it more, board members concluded that they "would not be able to provide you with the type of information you are looking for" and "that speaking with small business owners would be more beneficial," the society said in an email to NHBR.But some accountants approached individually did give an indication about why it wasn't being pushed."It's a lot of work, and then you find out when you're all done, that it didn't save the client any money, which can make it pretty difficult to bill for," said Feinberg.Feinberg himself, however, did that work, despite it being "a huge pain for us" but "I knew I had to ask the questions [of the client necessary to get the credit] as a competitive measure."And for some clients - three to be exact - it did pay off. When he amended the return for a new client a few months ago, the previous accountant didn't ask the question, and Feinberg was able to save the client about $3,000. "It's hard to say it wasn't worth it -- at least for those clients."Some of the larger accounting firms, however, serve larger businesses, "and you have to be a really small business to qualify," said Stephen Lawler with Nathan Wechsler and Company, a Concord-based accounting firm. "And those businesses are least likely to provide health care coverage, and that $25,000 [income limit] is pretty small. At the end of the day, it is not worth very much."Very small businesses also have several other strikes going against them in taking advantage of the credit. They are less likely to have an accountant, and in doing it themselves are less likely to navigate through the complicated new tax break. They are also less likely to make enough money to pay taxes, and less likely to utilize the carryfoward deduction, as well as less likely to survive long enough to take advantage of it.Nonprofits can get a refund -- a credit without paying taxes for the same tax year -- rather than having to carry it forward to the next year. But, unless they have a for-profit arm (which the smaller nonprofits are less likely to have) -- they would have to fill out an extra form-- the 990-T - they wouldn't otherwise have had to fill out.In addition, their maximum credit is smaller than that received by their for-profit counterparts -- currently 25 percent, as opposed to 35 percent, and 35 percent, as opposed to 50 percent, in 2014.Small businesses also have more trouble qualifying on the wage end, particularly in New Hampshire. For one, average wages are higher in New Hampshire. Second, because of the state's business profits tax, small-business owners are likely to take as much compensation as they legally can in wages. In a larger business, that doesn't matter that much, but in a smaller business, one high-wage earner is more likely to bring up the average wage, reducing or even eliminating the tax credit."You have a few key people in a small organization, and it's very hard to have an average wage of $25,000," said Kincaid-Brown. "Even a livable wage, about $12 an hour, is about $25,000. So if you are a small business trying to fairly compensate your employees, you are already above the average."Businesses with fewer employees have less clout with insurers, and therefore often have to pay higher-than-average premiums. But they only receive a credit based on the average premium in the state.In 2010, according to the IRS, that was $5,519 for an individual and $13,624 for a family."That looks really low," said Kincaid-Brown. "I look at my clients and what they are paying in fees and it's much more than that."After Kincaid-Brown redoes the calculation with the state average, as opposed to what people are actually paying, it's the difference between a $5,000 credit and a $3,000 credit, she said.The aforementioned Monadnock Conservancy ended up with a $2,300 credit. The organization paid 75 percent of the premiums for six full-time equivalents in 2010. Its average wage was $44,000, so it fell way short of the maximum credit, which would have been 25 percent of its premiums.On top of that, the company's premiums increased by 12 percent the same year, to a total of $46,000 -- more than wiping out what it gained in the credit, forcing the company to increase its employee's deductibles."We were grateful to get something," he said. "But it didn't make any difference."Finally, small businesses are likely to have a larger percentage of family members. And those premiums are not counted in the credit.Notchland Inn owner Butler, a former Democratic state representative and a strong supporter of health care reform, knew about the credit, but he wasn't able to take advantage of it.Although he offered to pay 80 percent of his employees' premiums, only a few of his 10 employees participated in the health plan because premiums rose 16 percent last year. Thus, he paid less than 50 percent of what it would take to cover all of his employees."I can't see any small business who wouldn't take advantage of it if they could," he said. "But most small business can't afford to help their employees with health insurance. They have difficulty staying afloat, and this credit is not likely to make much of a difference for them."

 

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