The Patient Protection and Affordable Care Act (Health Care Act) provides a new beneficial tax credit for small employers. For tax years beginning in 2010 through 2013, this legislation provides the small employer health insurance credit for qualified small employers that purchase health insurance for their employees. A qualified small employer is generally one that (a) employs no more than 25 Full-time Equivalent (FTE) employees during its tax year, (b) pays annual FTE wages that average no more than $50,000, and (c) has a qualified health insurance plan (or arrangement) that requires it to pay at least 50% of the premiums (on a uniform basis) on behalf of all of its employees who enroll in the plan.
Self-employed individuals, including partners and sole proprietors, 2% (or greater) shareholders of an S corporation, and 5% (or greater) owners of the employer, are not treated as employees for purposes of this credit.
For 2010, the credit generally equals 35% (25% for tax-exempt employers) of the lesser of (a) the amount of contributions the employer made during the tax year to its qualified health arrangement to purchase qualifying health coverage for its employees or (b) the amount of contributions that the employer would have made during the tax year to its qualified health arrangement if each employee had enrolled in coverage with a small business benchmark premium. The small business benchmark premium will be determined by the Secretary of Health and Human Services each year on a state-by-state basis. Benchmark premium information will then be provided by the IRS.
However, the full amount of the credit is available only to an employer with 10 or fewer FTE employees who have average annual FTE wages of less than $25,000. The credit will phase out when those thresholds are exceeded. Also, only non elective employer contributions qualify. Basically, this means that employee elective contributions to the plan that are used by the employer to pay for the employee’s coverage don’t qualify for the credit.
For tax years beginning in 2014 and later, eligible small employers who purchase coverage through a state-run Insurance Exchange will be eligible for a tax credit for two additional years of up to 50% (35% for tax-exempt employers) of their contribution. So, a qualified small employer could potentially qualify for the credit for six years—four years under the first phase (2010 through 2013) and two years under the second phase beginning in 2014. Also, the wage limits will be indexed for inflation beginning in 2014.
The credit presumably applies regardless of the type of entity in which an employer conducts business. Thus, a qualified employer can be a C or an S corporation, partnership, limited liability company (LLC), or sole proprietorship.
This is a brief overview of the small employer health insurance credit. Please contact Charles for an in-depth discussion of this credit and to assess its impact on your business. Keep in mind this is a credit, not a deduction, so it will offset your tax bill on a dollar-for-dollar basis.
If you currently offer group health insurance for your employee's contact Charles to obtain a market summary report. This will give you the latest details on current plans and rates due to legislation on the health reform.
Thursday, August 19, 2010
Qualified Transportation Fringe Benefits
Employers can help employees get to and from work in a tax-favored manner. Within certain monthly dollar limits, employer-provided qualified transportation fringe benefits are exempt from tax. The following fringe benefits are currently available.
Commuter Transportation - Transportation provided by or for an employer in a commuter highway vehicle (e.g., van pool vehicle) qualifies as an excludable transportation fringe benefit. A commuter highway vehicle is one in which (a) there is seating capacity for at least six adults (other than the driver) and (b) at least 80% of the mileage is reasonably expected to be for transporting employees between their residences and their place of work and for trips where at least half the adult seating capacity is occupied by employees.
Transit Passes - These include passes, tokens, vouchers, or similar items that entitle the employee to transportation. They must be for transportation (1) on mass transit facilities (whether or not publicly owned) or (2) provided by a person in the business of transporting people in a vehicle seating at least six adults other than the driver. There are no substantiation requirements for transit passes provided directly by the employer. Also, transit pass reimbursements qualify if a voucher or similar item exchangeable for a transit pass is not readily available.
Qualified Parking - This is parking provided on or near the employer’s business premises, or on or near a location from which the employee commutes to work by mass transit or hired commuter highway vehicle.
Bicycle Commuting Reimbursement - This includes any employer reimbursement of reasonable expenses incurred by the employee for the purchase, improvement, repair, and storage of a bicycle regularly used for commuting from the employee’s residence to the place of employment.
Employers can use compensation reduction arrangements for qualified transportation benefits. Under this arrangement, employees will not be taxed solely because they can choose between any qualified transportation fringe benefit and cash compensation. Only employees who choose cash instead of the benefit are taxed.
Please contact us to determine which of these provisions would benefit your business.
Commuter Transportation - Transportation provided by or for an employer in a commuter highway vehicle (e.g., van pool vehicle) qualifies as an excludable transportation fringe benefit. A commuter highway vehicle is one in which (a) there is seating capacity for at least six adults (other than the driver) and (b) at least 80% of the mileage is reasonably expected to be for transporting employees between their residences and their place of work and for trips where at least half the adult seating capacity is occupied by employees.
Transit Passes - These include passes, tokens, vouchers, or similar items that entitle the employee to transportation. They must be for transportation (1) on mass transit facilities (whether or not publicly owned) or (2) provided by a person in the business of transporting people in a vehicle seating at least six adults other than the driver. There are no substantiation requirements for transit passes provided directly by the employer. Also, transit pass reimbursements qualify if a voucher or similar item exchangeable for a transit pass is not readily available.
Qualified Parking - This is parking provided on or near the employer’s business premises, or on or near a location from which the employee commutes to work by mass transit or hired commuter highway vehicle.
Bicycle Commuting Reimbursement - This includes any employer reimbursement of reasonable expenses incurred by the employee for the purchase, improvement, repair, and storage of a bicycle regularly used for commuting from the employee’s residence to the place of employment.
Employers can use compensation reduction arrangements for qualified transportation benefits. Under this arrangement, employees will not be taxed solely because they can choose between any qualified transportation fringe benefit and cash compensation. Only employees who choose cash instead of the benefit are taxed.
Please contact us to determine which of these provisions would benefit your business.
Donating a Life Insurance Policy to a Charity
Many people would contribute more to charity if they could afford it. One often overlooked asset that could be donated to charity is a life insurance policy that is no longer needed for its original intended purpose. Individuals who might be receptive to this type of charitable gift include those still carrying large amounts of life insurance even though the major financial obligations in their lives have been met.
Of course, good reasons may exist for keeping the policy in force (such as to provide liquidity for a taxable estate or to meet the continuing needs of a surviving spouse or disabled child). Other times, the best option simply will be to cancel any excess coverage, convert it into a paid-up policy with a lower face amount, or sell the policy in a life settlement transaction. Still, for clients with both excess life insurance and a charitable intent, the donation of a life insurance policy may make sense. However, the donation must be handled correctly for the policy owner to get the maximum tax benefits. Here’s the deal.
Seizing on this situation as an opportunity, some charities ask their donors to consider donating life insurance policies rather than (or in addition to) cash in order to make substantially larger gifts than would otherwise be possible. The advantage to donors is that they can make a sizable gift with relatively little up-front cash (or even no cash, if an existing policy is donated). That a charity may have to wait many years before receiving a payoff from the gift is typically not a problem because charities normally earmark such gifts for their endowment or long-term building funds.
If handled correctly, a life insurance policy donation can net the donor a charitable deduction equal to the value of the policy. A charitable deduction is also available for cash contributed in future years to pay premiums on a policy that was not fully paid up at the time it was donated. However, if handled incorrectly, the deduction is lost. For this reason, we encourage you to contact us if you are considering the donation of a life insurance policy. We can help ensure you receive the expected income or transfer tax deduction and that the contribution works as planned.
Of course, good reasons may exist for keeping the policy in force (such as to provide liquidity for a taxable estate or to meet the continuing needs of a surviving spouse or disabled child). Other times, the best option simply will be to cancel any excess coverage, convert it into a paid-up policy with a lower face amount, or sell the policy in a life settlement transaction. Still, for clients with both excess life insurance and a charitable intent, the donation of a life insurance policy may make sense. However, the donation must be handled correctly for the policy owner to get the maximum tax benefits. Here’s the deal.
Seizing on this situation as an opportunity, some charities ask their donors to consider donating life insurance policies rather than (or in addition to) cash in order to make substantially larger gifts than would otherwise be possible. The advantage to donors is that they can make a sizable gift with relatively little up-front cash (or even no cash, if an existing policy is donated). That a charity may have to wait many years before receiving a payoff from the gift is typically not a problem because charities normally earmark such gifts for their endowment or long-term building funds.
If handled correctly, a life insurance policy donation can net the donor a charitable deduction equal to the value of the policy. A charitable deduction is also available for cash contributed in future years to pay premiums on a policy that was not fully paid up at the time it was donated. However, if handled incorrectly, the deduction is lost. For this reason, we encourage you to contact us if you are considering the donation of a life insurance policy. We can help ensure you receive the expected income or transfer tax deduction and that the contribution works as planned.
Tax Breaks for Business Owner's Employee Relatives
The Hiring Incentives to Restore Employment Act (the HIRE Act) includes two temporary payroll tax breaks intended to boost hiring. An interesting point about these breaks is that they could be claimed for a business owner’s newly hired spouse. They might also be claimed for wages paid to other newly hired relatives of a minority business owner (a person who owns 50% or less of the employer, after considering both direct and indirect ownership). The information below summarizes how the two tax breaks can apply for wages paid to spouses and other relatives of business owners.
1. Social Security Tax Exemption for Wages Paid to Eligible New Hires
Wages paid by a private-sector business (large and small alike) to a qualified new employee between March 19, 2010 and December 31, 2010, are exempt from the 6.2% employer portion of the social security tax. The maximum amount of employer social security tax savings for a high-paid employee is $6,622 (6.2% × $106,800 social security tax ceiling for 2010). However, the actual savings realized will be less for high-paid workers who are paid less than $106,800 between March 19, 2010 and year-end.
Qualified new employees are full-time or part-time workers who start work between February 4, 2010 and December 31, 2010, and who provide the employer with a signed IRS Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, certifying that they were not employed more than 40 hours during the 60-day period ending on their start dates. However, the new worker cannot replace another worker unless that person quit voluntarily or was discharged for cause.
Employer Is a Sole Proprietor - When the employer is a sole proprietorship or a single-member LLC treated as a sole proprietorship for tax purposes, wages paid between the specified dates to the taxpayer’s (owner’s) newly hired spouse are eligible for the temporary social security tax exemption if the spouse meets the preceding definition of a qualified new employee. Wages paid to other newly hired relatives of the owner (including in-laws) generally will be ineligible.
Employer Is a Corporation - When the employer is a corporation, wages paid between the specified dates to a majority shareholder’s newly hired spouse are eligible for the temporary social security tax exemption if the spouse meets the definition of a qualified new employee. (A majority shareholder owns more than 50% of the employer, after considering both direct and indirect ownership.) Wages paid to other newly hired relatives of a majority share-holder (including in-laws) generally will be ineligible. However, wages paid either to a newly hired spouse or other relative of a minority shareholder are eligible if the new hire meets the definition of a qualified new employee and is not a relative of the majority owner.
Employer Is a Partnership - When the employer is a partnership (including a multimember LLC treated as a partnership for tax purposes), wages paid between the specified dates to a majority partner’s newly hired spouse are eligible for the temporary social security tax exemption if the spouse meets the definition of a qualified new employee. (A majority partner owns more than 50% of the employer, after considering both direct and indirect ownership.) Wages paid to other newly hired relatives of a majority partner (including in-laws) generally will be ineligible. However, wages paid to a newly hired spouse or other relative of a minority partner are eligible if the new hire meets the definition of a qualified new employee and is not a relative of the majority partner.
2. Tax Credit for Retaining Eligible New Hires
In addition to the social security tax exemption, employers can also claim a new temporary tax credit of up to $1,000 for wages paid to each qualified new employee who is retained for at least 52 consecutive weeks. Wages paid during the second 26 weeks of the 52-week period must equal at least 80% of wages paid during the first 26 weeks of that period. The definition of a qualified new employee is the same as for the social security tax exemption.
The credit amount equals the lesser of 6.2% of wages paid during the 52-consecutive-week period, or $1,000. To claim the maximum $1,000 credit, the worker must be paid at least $16,130 during the 52-week period.
Here’s the important point: even if the new hire is a spouse or relative of a business owner and is eligible for the social security tax exemption, wages paid to that spouse or relative may also be eligible for the new employee retention credit. That’s because the definition of a qualified new employee is the same for both breaks.
Time Is of the Essence!
If you have questions or want more information about the temporary social security tax exemption or the temporary new employee retention credit, please contact us. The eligibility rules in family business situations are complicated, and these breaks will soon expire.
1. Social Security Tax Exemption for Wages Paid to Eligible New Hires
Wages paid by a private-sector business (large and small alike) to a qualified new employee between March 19, 2010 and December 31, 2010, are exempt from the 6.2% employer portion of the social security tax. The maximum amount of employer social security tax savings for a high-paid employee is $6,622 (6.2% × $106,800 social security tax ceiling for 2010). However, the actual savings realized will be less for high-paid workers who are paid less than $106,800 between March 19, 2010 and year-end.
Qualified new employees are full-time or part-time workers who start work between February 4, 2010 and December 31, 2010, and who provide the employer with a signed IRS Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, certifying that they were not employed more than 40 hours during the 60-day period ending on their start dates. However, the new worker cannot replace another worker unless that person quit voluntarily or was discharged for cause.
Employer Is a Sole Proprietor - When the employer is a sole proprietorship or a single-member LLC treated as a sole proprietorship for tax purposes, wages paid between the specified dates to the taxpayer’s (owner’s) newly hired spouse are eligible for the temporary social security tax exemption if the spouse meets the preceding definition of a qualified new employee. Wages paid to other newly hired relatives of the owner (including in-laws) generally will be ineligible.
Employer Is a Corporation - When the employer is a corporation, wages paid between the specified dates to a majority shareholder’s newly hired spouse are eligible for the temporary social security tax exemption if the spouse meets the definition of a qualified new employee. (A majority shareholder owns more than 50% of the employer, after considering both direct and indirect ownership.) Wages paid to other newly hired relatives of a majority share-holder (including in-laws) generally will be ineligible. However, wages paid either to a newly hired spouse or other relative of a minority shareholder are eligible if the new hire meets the definition of a qualified new employee and is not a relative of the majority owner.
Employer Is a Partnership - When the employer is a partnership (including a multimember LLC treated as a partnership for tax purposes), wages paid between the specified dates to a majority partner’s newly hired spouse are eligible for the temporary social security tax exemption if the spouse meets the definition of a qualified new employee. (A majority partner owns more than 50% of the employer, after considering both direct and indirect ownership.) Wages paid to other newly hired relatives of a majority partner (including in-laws) generally will be ineligible. However, wages paid to a newly hired spouse or other relative of a minority partner are eligible if the new hire meets the definition of a qualified new employee and is not a relative of the majority partner.
2. Tax Credit for Retaining Eligible New Hires
In addition to the social security tax exemption, employers can also claim a new temporary tax credit of up to $1,000 for wages paid to each qualified new employee who is retained for at least 52 consecutive weeks. Wages paid during the second 26 weeks of the 52-week period must equal at least 80% of wages paid during the first 26 weeks of that period. The definition of a qualified new employee is the same as for the social security tax exemption.
The credit amount equals the lesser of 6.2% of wages paid during the 52-consecutive-week period, or $1,000. To claim the maximum $1,000 credit, the worker must be paid at least $16,130 during the 52-week period.
Here’s the important point: even if the new hire is a spouse or relative of a business owner and is eligible for the social security tax exemption, wages paid to that spouse or relative may also be eligible for the new employee retention credit. That’s because the definition of a qualified new employee is the same for both breaks.
Time Is of the Essence!
If you have questions or want more information about the temporary social security tax exemption or the temporary new employee retention credit, please contact us. The eligibility rules in family business situations are complicated, and these breaks will soon expire.
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