Nathan Olansen
Rack Law Firm
For small businesses owners, recently enacted legislation includes key tax provisions to which we must pay attention. The following is a very brief overview of a few of the noteworthy tax provisions found in the 2010 Health Care Act as Amended by the 2010 Health Care Reconciliation Act (“Health Care Act”), and the Hiring Incentives to Restore Employment Act of 2010 (“HIRE Act”). The provisions discussed are effective in either 2010 or 2011, and include a few provisions to keep an eye on over the next few years.
This discussion casts a wide net and highlights several relevant provisions that provide both tax benefits and limitations on many small businesses, their owners and employees. For comprehensive advice regarding any of the discussed provisions, and how they may affect you or your business, we highly recommend contacting your tax professional.
- Contributions to health flexible spending arrangements (FSAs) limited to $2,500
An FSA is one of a number of tax-advantaged financial accounts that can be set up through an employer’s cafeteria plan that allows an employee to set aside a portion of his or her pre-tax earnings to pay for qualified expenses, most commonly 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. Beginning Jan. 1, 2013, the Health Care Act limits allowable contributions to health FSAs to only $2,500 per year. - Dependent coverage in employer health plans
Effective March 30, 2010, the Health Care Act extends the general exclusion for reimbursement of 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 also applies to the exclusion for employer-provided coverage under an accident or health plan for injuries or sickness for a child. Further, the law permits self-employed individuals 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. - Payroll tax holiday and credit for employers who hire unemployed workers
The HIRE Act exempts any private-sector employer that hires a worker who had been unemployed for at least 60 days from having to pay the employer’s 6.2% share of the Social Security payroll tax on that employee for the remainder of 2010. A company could save a maximum of $6,621 if it hired an unemployed worker and paid that worker at least $106,800—the maximum amount of wages subject to Social Security taxes—by the end of the year. As an additional incentive, for any qualifying worker hired under this initiative who remains on the employer’s payroll for 52 continuous weeks, the employer is eligible for an additional non-refundable tax credit of up to $1,000, which the employer may take on its 2011 tax return. Only wages paid after March 18, 2010 receive the exemption for payroll taxes. - Limit reimbursement of over-the-counter medications from HSAs, FSAs, and MSAs
Beginning Jan. 1, 2011, the Health Care Act prohibits reimbursement from HSAs, FSAs and MSAs, for the costs of over-the-counter drugs not prescribed by a doctor. - Extension of enhanced small business expensing
The HIRE Act also gives a one-year lease on life to enhanced expensing rules, allowing qualifying businesses the option to deduct the cost of business machinery and equipment, instead of depreciating it over a number of years. For tax years beginning in 2010, the maximum amount that a business may expense is $250,000, and the expensing election begins to phase out when a business buys more than $800,000 of expensing-eligible assets. These dollar limits are the same as those that were in effect for 2008 and 2009, which would have dropped to $134,000 and $530,000, respectively, had Congress not acted. - Tax credits to certain small employers that provide insurance
The Health Care Act provides small employers with a tax credit for non-elective contributions to purchase health insurance for their employees. This credit can offset an employer’s regular tax or its alternative minimum tax liability. 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, and the employees must have annual full-time equivalent wages that average no more than $50,000. The credit is initially available for any tax year beginning in 2010, 2011, 2012 or 2013, and the credit phases out as business size and average wages increase. - Higher Medicare taxes on high-income taxpayers
Under the provisions of the Health Care Act, which takes effect in 2013, single filers earning more than $200,0000 and joint filers earning more than $250,000 will pay an additional 0.9% Medicare tax (2.35% in total) on the excess over the base amount, and self-employed persons will also pay an additional .9% tax (3.8% total). In addition, beginning in 2013, investment income becomes subject to the Medicare tax for the first time in U.S. history. The new tax is a 3.8% surtax imposed on net investment income of single taxpayers with adjusted gross income above $200,000 and joint filers over $250,000. Net investment income includes interest, dividends, royalties, rents and gain from capital transactions. However, the new tax will not apply to income in tax-deferred retirement accounts.
