Monthly Archives: July 2012

IRS Provides Relief for Credit Card Sales Reported on 1099-K

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Beginning in 2011, credit card companies were required to report business’ credit card sales to the IRS via Form 1099-K.  This form reported a business’ total credit card sales for the year, and the form broke that sales figure down into monthly totals.

A substantial problem with this form was that the credit card sales reported on the 1099-K included sales tax and employee tips.

Example:  JoJo’s Restaurant has credit card sales (excluding sales tax) of $600,000 for 2011.   At the end of the year, JoJo’s Restaurant received Form 1099-K showing credit card sales of $731,400.  The reason the sales on the 1099-K is much larger than the actual credit card sales is because it includes sales tax of $36,000 plus tips of $95,400 (assuming a 15% tip rate).

Since the sales reported on Form 1099-K will almost certainly exceed actual sales, businesses were required to reconcile the sales reported on Form 1099-K with their actual sales.  The above example was a fairly simple one—imagine if those sales included carry-out sales on which tips are not paid.  A point of sale system should be able to capture this information, but for restaurants using cash registers, it will be very, very difficult to gather this information.

Recognizing the hardship this would cause on businesses (plus the hardship on the IRS to actually audit this information), the IRS waived the reconciliation requirement for 2011 tax returns.  Based on a recent letter from the IRS deputy commissioner for services and enforcement, Steven Miller (not the singer), to the National Federation of Independent Businesses, the IRS is extending indefinitely the waiver of the reconciliation requirement.  Mr. Miller stated, “There will be no reconciliation on the 2012 form, nor do we intend to require reconciliation in future years. (emphasis added)”

Good news!  However, credit card companies will continue to issue Form 1099-K.  If the sales amount on these forms differ substantially from sales reported on tax returns, you may still want to conduct an informal reconciliation (not included on any tax filings) in case of an audit.

Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230

Special Tax Credit for Restaurants

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There is a tax credit available to restaurants that have tipped employees.  The credit is based on the FICA taxes paid by the restaurant on reported tips.  Although this credit has been available to restaurants for years, many tax professionals fail to inform their clients that the credit is available.  If you’re a restaurant owner, keep reading.

Background

Restaurants must pay FICA taxes on any tips reported by tipped employees.  This requirement has been criticized by the restaurant industry since 1987 because reported tips in excess of the minimum wage are not counted as wages under the Fair Labor Standards Act (FLSA).  Since tips in excess of minimum wage are not counted as wages under the FLSA, it is argued that it is not appropriate to require restaurants to pay FICA taxes on these tips.

As a result of lobbying by the restaurant industry, Congress created a tax credit in 1993 to offset some of the FICA taxes paid by restaurants on excess tips (tips that get the employee over minimum wage). The credit is named the Credit for Portion of Employer Social Security Paid with Respect to Employee Cash Tips.  They tried, but couldn’t come up with a longer name.

How it Works

The credit is calculated as 7.65% of tips in excess of the federal minimum wage.  For purposes of this tax credit, the federal minimum wage is capped at $5.15, and not at the normal $7.25 federal minimum wage.  Michigan’s minimum wage of $7.40 is not relevant to this credit; however, under Michigan law the employee’s base wage plus tips must be at least $7.40.

Example:  JoJo’s Restaurant has a tipped employee who earns $2.65 per hour.  The employee worked 1,500 hours during 2012 and had tips of $8,000.   

The tip tax credit is calculated as follows:

Hourly Tip Rate:         $5.33     ($8,000 tips divided by 1,500 hours)

Tips Deemed Wages:    $2.50     ($5.15 federal minimum wage less $2.65 wage)

Excess Tips per Hour:   $2.83     ($5.33 total tips less $2.50 tips treated as wages)

Total Excess Tips:      $4,245    ($2.83 excess tips per hour times 1,500 hours worked)

Tip Tax Credit               $325       ($4,245 times 7.65% FICA rate)

The tip tax credit for this single employee is $325. 

The tip tax credit is calculated for each individual employee.  Modern payroll software makes it much easier to determine how much of each employee’s tips are deemed wages and how much are excess tips.

There has been some confusion as to whether restaurant owners could claim the credit on unreported tips discovered during an IRS audit.  The answer is yes—restaurant owners can claim the tip tax credit on unreported tips discovered during an audit (good news if you’re looking for a silver lining during an audit.)

 

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230

 

Tax Credit for Hiring Veterans

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Congress, in order to encourage employers to hire members of targeted groups, provided a tax credit to employers who hire members of these groups.  This tax credit is the Work Opportunity Credit.  The credit expired for most targeted groups in 2011.  However, the VOW to Hire Heroes Act of 2011 extended the Work Opportunity Credit to qualified veterans who begin work before January 1, 2013.

The credit is 40% of qualified first year wages for certified veterans who work at least 400 hours, and 25% for certified veterans who work at least 120 hours but less than 400 hours.  Qualified wages are limited to $12,000; however, qualified wages for veterans who were unemployed for at least six months in the prior year are limited to $14,000.If the veteran has a service connected disability and was unemployed for at least six months in the prior year, qualified wages are limited to $24,000.

The veteran must be certified.  This is done by the employer filing Form 8850, Pre-Screening Notice & Certification Request for the Work Opportunity Credit, with the employer’s state workforce agency within 28 days after the eligible employee begins work.

Employers claim this credit as a general business credit against their income tax.  For tax-exempt employers, the Work Opportunity Credit is claimed against the employer portion of Social Security taxes.

Example 1:  John is an Iraq War veteran.  ABC Corp hires John during 2012. During 2012, John works 1,500 hours at $20 per hour ($30,000 gross pay for 2012).  Since John worked more than 400 hours, the Work Opportunity Credit equals 40% of his wages (up to the limit of $12,000).  ABC Corp claims a credit of $4,800.

Example 2:  Same as above, except John was unemployed for 7 months during 2011.  Since John was unemployed for more than six months in the prior year, the ceiling on qualifying wages is increased to $14,000.  The credit is now $5,600.

Example 3: Same as Example 2, except John was injured in Iraq.  Since John has a service related injury and was unemployed for at least six months in the prior year, the ceiling on qualifying wages is increased to $24,000.  The credit is now $9,600.  $9,600 is the maximum Work Opportunity Credit possible.

Example 2:  Same as above, except John only works 200 hours ($4,000).  Since John worked between 120 and 400 hours, his credit equals 25% of his wages of $4,000.  ABC Corp claims a credit of $1,000.

The Work Opportunity Credit targeted more groups in the past, but in 2012 it only applies to qualified veterans.  It is possible Congress will extend the credit for these other groups.  Groups that qualified for the credit in the past included:

  • Qualified IV-A recipients
  • Ex-felons
  • Long term family assistance recipients
  • Vocational rehabilitation referrals
  • Summer youth employees
  • Nutrition assistance recipients
  • Social security income recipients
  • Designated community residents
  • Disconnected youths

These groups may qualify in the future.  We’ll keep our eyes open.

Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230

 

You’re Still Getting a Bonus (Depreciation) in 2012

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Normally, when you buy long lived property, you can’t deduct the full cost of the property in the year you purchase it.  The purchase price is deducted over the expected life of the property.  In late 2010 through 2011, business owners were allowed to immediately deduct 100% of the cost of certain assets.  This was known as 100% bonus depreciation.  100% bonus depreciation ended on December 31, 2011.  Bonus depreciation is alive and well in 2012; however, it has been reduced to 50% from 100%.  50% bonus depreciation lasts through December 31, 2012.  It is extended to December 31, 2013 for property having a longer production period (discussed later).

What is Eligible Property?

To be eligible for bonus depreciation, the property must meet three criteria:

1.  The asset must be qualified property

  • The asset must have a recovery period of 20 years or less.  This includes most tangible personal property.  It excludes almost all real estate.
  • General purpose buildings used in agriculture, such as machine sheds and shops, are 20 year property and are eligible for bonus depreciation
  • Off the shelf software qualifies
  • Qualified leasehold improvement property qualifies

2.  The ORIGINAL use must commence after December 31, 2007

  • The asset must generally be NEW.  Used property doesn’t qualify.
  • New property initially used by a taxpayer for personal use and subsequently converted to business use meets the original use requirement
  • Expenditures to recondition or rebuild assets satisfies the original use requirement, but purchases of reconditioned or rebuilt assets do not qualify.  However, an asset that contains used parts will not be considered used if the cost of the used parts is 20% or less of the total cost.

3.  The asset must be acquired and placed in service on or before December 31, 2012

  • The placed in service requirement is extended to December 31, 2013 for property that has a longer production period and has an expected life of at least 10 years OR is commercial transportation property or certain aircraft.
  • A longer production period is defined as exceeding two years OR an estimated production period exceeding one year and a cost exceeding $1 million.
  • Only costs attributable to production before January 1, 2013 will qualify for this exception.

Qualified leasehold improvement property also qualifies for 50% bonus depreciation.  Qualified leasehold improvement property meets the following tests:

  • The improvement is to an interior of a building
  • The building is nonresidential
  • The improvement is made pursuant to a lease by either the lessee, sublessee, or by the lessor to property to be occupied by the lessee or sublessee
  • The improvement is placed in service more than three years after the date the building was first placed in service by any person
  • Leases between related parties do not qualify

Call us if you would like to discuss how this applies in your business.

 

Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230

 

The New Medicare Tax on Investment Income

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Under the 2010 Health Care Act, Medicare taxes will be going up for certain people on January 1, 2013.  There are two separate Medicare tax increases.  One will be a 3.8% Medicare tax on unearned income.  The other is a 0.9% Medicare tax on wages and self-employment income.  This post describes the 3.8% Medicare Contribution Tax on unearned income.

The Medicare Contribution Tax (3.8%) on Unearned Income

This tax is levied on unearned income such as interest, dividends, annuities, royalties, rents, and capital gains.  It also includes flow through income from an LLC or S corporation in which the owners are not active (e.g., investors ).

The tax is 3.8% of the lesser of:

  • Net investment income OR
  • The excess of modified adjusted gross income over the applicable threshold amount

Some definitions:

Net Investment Income is investment income reduced by investment expenses (e.g., research expenses, advisory fees, etc.)

Modified Adjusted Gross Income is adjusted gross income increased by excluded foreign earned income (there is an exemption from U.S. tax for certain income earned overseas-but this is a topic for a separate blog post).

The Applicable Threshold Amount is $250,000 for joint filers or surviving spouses, $200,000 for single filers, and $125,000 for married filing separate filers.

Net Investment Income Does NOT Include:

  • Distributions from regular or Roth IRAs
  • Distributions from 401(k) or other qualified plans
  • Social Security Income
  • Life insurance proceeds
  • Municipal bond interest
  • Veterans’ benefits
  • Gain from the sale of a personal residence if the gain doesn’t exceed the exclusion amounts of $500,000 for a joint return and $250,000 for a single filer
  • Income from businesses where the owners materially participate

Example:  John files a joint return and has $150,000 in wages, $30,000 in interest income, $70,000 in rental income, and a $30,000 gain on the sale of a rental property.  John’s modified adjusted gross income is $280,000.  John’s net investment income is $130,000 (the $30,000 in interest, $70,000 in rental income, and $30,000 gain from the rental property).  John’s Medicare Contribution tax equals 3.8% times the lesser of:

  • Net investment income of $130,000 OR
  • The excess of modified adjusted gross income over the applicable threshold amount.  This amount is $30,000 ($280,000 modified adjusted gross income less $250,000 threshold amount).

John’s Medicare Contribution tax is therefore $1,140 (3.8% times $30,000).

Example 2: Jill has $200,000 in wages.  She is a passive investor in an S corporation, ABC Corp (i.e., outside of her investment in ABC Corp, she has no involvement in the business).  She has $100,000 in flow through income from ABC Corp.  She also sold some of her ABC Corp stock for a $50,000 gain.  Jill’s modified adjusted gross income is $350,000.  Since Jill is not active in ABC Corp, her flow through profit of $100,000 and her gain on sale of stock of ABC Corp of $50,000 are considered investment income.  Jill’s Medicare Contribution tax is calculated as 3.8% times the lesser of:

  • Net investment income of $150,000 OR
  • The excess of modified adjusted gross income over the applicable threshold amount.  This amount is $100,000 ($350,000 modified adjusted gross income less $250,000 threshold amount).

Jill’s Medicare Contribution tax is $3,800.

Example 3: Joan works full time in her S corporation, ABC Corp.  She has $200,000 in wages and $100,000 in flow-through profit from ABC Corp.  She also sold some of her ABC Corp stock for a $50,000 gain.  Based on Joan’s full time employment in ABC Corp, she materially participates in the business.  Since she materially participates, her flow through profit of $100,000 and gain on sale of stock of ABC Corp of $50,000 are NOT included in net investment income.  Therefore, Joan is not subject to the 3.8% Medicare Contribution tax.

Some tips on avoiding the Medicare Contribution Tax:

  • Try to accelerate income into 2012 so that modified adjusted gross income in 2013 will be under the threshold
  • People owning rental property should try to qualify as a real estate professional
    • This requires more than 50% of time spent in real estate activity and 750 hours per year in real estate activity
    • Consider investing in municipal bonds
      • Municipal bond interest is not subject to the 3.8% tax
      • It also does not increase modified adjusted gross income so it may reduce the tax on other investment income
      • Business owners should try to qualify as active owners in their businesses so that flow through income and gain on sale of ownership interests are not subject to the tax.

For more information on how this applies in your situation, please give us a call.

 

Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230

 

The Small Business Health Care Credit

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Beginning in 2010, small businesses are eligible for a tax credit by providing qualified health care coverage for their employees.  The credit starts off smaller during 2010 to 2013, but fully kicks in starting 2014.  Despite the hype, very few businesses have qualified for this credit due to its limitations on the number of employees and average wage of employees.

How Much is the Credit?

During 2010 to 2013, the maximum credit is 35% of the employer’s premium expenses.  Starting in 2014, the maximum credit is increased to 50% of the employer’s premium expenses.

Who Qualifies for the Credit?

Small businesses must meet three requirements to qualify for the credit:

  • employers must have fewer than 25 full time equivalent (FTE) employees
  • the average annual wages must be less than $50,000 per FTE
  • the employer must pay the premiums under a qualifying arrangement.

Determining Number of FTEs

Employers calculate the number of FTEs by dividing the total number of employee hours worked (by both full time and part time employees) during a year by 2,080.  If the result is not a whole number, the result is rounded down.

Example:  ABC Corp reviews its payroll reports and determines that all of its employees (full and part time) worked 10,000 hours during the year.  ABC Corp divides the 10,000 total hours worked by 2,080 to calculate its FTEs (10,000 hours divided by 2,080 equals 4.81 rounded down to 4 FTEs).

Determining Average Annual Wages

To calculate average annual wages, the employer divides its total wages for the year by the number of its FTEs.

Example:  ABC Corp has $80,000 total payroll for the year.  To determine if its average annual wages are under $50,000 it divides its total payroll ($80,000) by the number of its FTEs (4).  Its average annual wages for the year is $20,000. 

In calculating average annual wages, wages for seasonal employees and owners and their families are excluded from the calculation.

What, Pray Tell, is a Qualifying Arrangement?

Under a qualifying arrangement, the employer pays premiums for each employee enrolled in health care coverage offered by the employer in an amount equal to a uniform percentage (not less than 50%) of the premium cost of coverage.  The credit only applies to the employer paid portion.

Example:  ABC Corp pays 80% of the premiums for each of its employees.  Since it pays more than 50% of each employee’s premium, it qualifies for the credit (but only on the 80% that the employer pays, not on the 20% paid by employees).

Example 2:  ABC Corp pays 40% of the premiums for each of its employees.  Since it pays less than 50% of each employee’s premium, it does not qualify for the credit.

Example 3:  ABC Corp pays 60% of the premiums for some employees, and 30% of the premiums for other employees. ABC Corp does not qualify for the credit because it does not pay a uniform percentage of each employee’s health premium.  

There is an upper limit on the amount of premiums that qualify for the credit.  If the average premium for a small group market in a State is less than the premiums paid by the employer, the amount of the average premium for a small group market in the state will be used instead of the actual premiums paid by the employer.

Calculating the Credit Phaseout

The full credit is allowed if the employer has up to 10 employees and up to $25,000 average annual wages.  If the employer has more than 10 employees OR average annual wages exceeding $25,000 the credit begins to phase out.

The credit reduction for the FTE phaseout is calculated as:

Number of FTE over 10 divided by 15

ABC Corp has $80,000 of insurance premiums, and its maximum credit for 2010 is $28,000 ($80,000 times the 35% credit).

If ABC Corp has 18 employees, the credit reduction is calculated as follows:

(18 minus 10) divided by 15 = 53%

The FTE phaseout reduces the $28,000 credit from above by 53%.  The credit must be reduced by $14,840.

The credit reduction for the average wage phaseout is calculated as:

Amount of Average Wages over $25,000 divided by $25,000.

If ABC Corp has average annual wages of $30,000, the phaseout is calculated as:

($30,000 minus $25,000) divided by $25,000 = 20%.

The average annual wage phaseout reduces the $28,000 credit from above by 20%.  The credit must be reduced by $5,600.

When the employer has more than 10 FTEs and more than $25,000 in average annual wages, the FTE credit reduction and the wage credit reduction are added together.  Thus, ABC Corp’’s total reductions are 20,440 ($14,840 FTE reduction plus $5,600 wage phaseout).  So, ABC Corp’s credit is $7,560 (total credit of $28,000 reduced by total credit reductions of $20,440).

At this point you’re probably sick of reading this post, so I’ll leave you with a few quick bullet points:

  • The credit is claimed on the employer’s annual income tax return
  • it is NOT a refundable credit
  • It is a general business credit that can be carried back 1 year and forward 20 years
    • However, since 2010 is the first year, it cannot be carried back for 2010.
  • Tax exempt organizations qualify for the credit under slightly different rules (check back for upcoming blog posts).

There you have it, a brief 3 page overview of the new small business health care credit.  I’ll be posting more frequently (possibly twice a week) over the next few months to keep you up to date on the constant tax law changes.  The tax laws are a-changin’.

If you have any questions on how this applies to your business, please feel free to give us a call.

Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230

The Health Care Law Giveth and Taketh

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The recently upheld health care law giveth by providing a tax credit to those who purchase health insurance through a state exchange.  The health care law taketh by imposing an excise tax on uninsured individuals.  This article will explain both the tax subsidy and the excise tax.

The Tax Law Giveth–Premium Assistance Credit

Beginning January 1, 2014, a refundable tax credit is available for people who buy health insurance through a state exchange.  A person can enroll in a plan offered through an exchange and report his/her income to the exchange.  Eligibility for the premium assistance credit is based on the individuals income for the year ending two years prior to enrollment (e.g., if someone enrolls in coverage in 2014, the credit is based on the person’s income for 2012.)

The credit is available for individuals (single or joint filers) with household incomes between 100% and 400% of the federal poverty level who do not receive health coverage through an employer or through a spouse’s employer.

The amount of the credit is determined by the secretary of Health and Human Services, based on the excess of premiums over a threshold amount—2% of income for those at 100% of the poverty level to 9.5% of income for those at 400% of the poverty level.

Example:  John and Jane, who have one child, have income at 100% of the federal poverty level.  Their  income is $18,310.  They buy health insurance through a state exchange and pay $4,000 in premiums.  The credit is the amount by which their premiums ($4,000) exceeds 2% of their income, or $366.20 ($18,310 * .02).  Their credit is $3,633.80 ($4,000 minus $366.20).

Example 2: Same as above except John and Jane have income at 400% of the poverty level.  Their income is $73,240.  To claim the credit, their health insurance premium has to exceed 9.5% of their income, or $6.957.80 ($73,240 * .095).  Since their premiums of $4,000 are less than 9.5% of their income, they cannot claim a credit.

The poverty level is based on the number of people in the family, so if John or Jane have more or fewer children, the amount of the credit will change.

The Department of Treasury will pay the credit to the state exchange, and taxpayers will be liable for the balance of the insurance premium.  Alternatively, taxpayers may pay the full premium to the state exchange, and then claim the credit on their income tax returns.

The Tax Law Taketh—Excise Tax on Uninsured Individuals

Beginning January 1, 2014 the evil twin of the Premium Assistance Credit, the excise tax on uninsured people, begins.  The excise tax is phased in during 2014 and 2015.

When the excise tax is fully phased in during 2016, individuals who do not have minimum essential coverage will be subject to a penalty equal to the GREATER of :

  • 2.5% of the amount by which the taxpayer’s household income for the year exceeds the threshold amount of income required for filing a tax return
    • The “threshold amount of income required for filing a tax return” is based on filing status.  If your income is below these amounts, you generally do not need to file a tax return.  For 2009, examples of some of the thresholds were:
      • Single                                 $ 9,350
      • Married Filing Joint             $18,700
      • Married Filing Separate      $  3,650
  • $695 per uninsured adult in the household.

Example:  Joan is single and has $60,000 of income and does not have health insurance.  The filing threshold for a single person is $9,350.  Her excise tax equals the greater of:

  • 2.5% of her income over her filing threshold=.025 * ($60,000 minus $9.350) = $1,266.25 or
  • $695.

Joan must pay an excise tax of $1,266.25. 

The filing thresholds in the example are for 2009, they will be different in 2014 when the excise tax takes effect.

The excise tax is phased in during 2014 to 2015 as follows:

2014:  greater of 1% of income over filing threshold or $95

2015:  greater of 2% of income over filing threshold or $325

According to the statute, the IRS cannot enforce collection by lien or seizure, and noncompliance will not be subject to criminal penalty.  Regardless, if you don’t pay the excise tax, expect some nasty collection letters and expect the IRS to reduce any federal tax refunds by the unpaid excise tax.

If you have any questions on how this applies to your business, please feel free to give us a call.

Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230

 

Mandate for Employers with 50 or More Full Time Employees

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The health care law requires employers with 50 or more full time equivalent employees to provide health care coverage or pay a penalty.  An employer with 50 or more full time employers is considered a large employer.  A full time employee is defined as an employee working 30 or more hours per week.  The hours worked by part-time employees (i.e., those working less than 30 hours per week) are included in the calculation of a large employer, on a monthly basis, by taking their total number of monthly hours worked divided by 120.

Example:  ABC Company has 40 employees who work more than 30 hours per week and 20 employees who work 24 hours per week.  Each of the 40 employees working more than 30 hours per week is a full time employee.  Full time equivalent employees are calculated as:

Number of part time employees (20) times the number of hours they work in a month (96, which is 24 hours per week times 4 weeks in a month).  This product is 1,920.  Dividing 1,920 by 120 equals 16 full time equivalent employees.  The employer therefore has 56 full time equivalent employees (40 employees working more than 30 hours per week plus part time employees who are equivalent to 16 full time employees).

A NONDEDUCTIBLE penalty will be assessed on a large employer that:

  • Fails to offer any full time employee the opportunity to enroll in minimum essential coverage under an employer plan if at least one full time employee is enrolled in an insurance exchange AND receives a premium assistance credit or cost sharing
    • The monthly penalty is 1/12 * $2,000 * (the number of full time employees minus 30).  The penalty would apply to employers with 50 or more workers, but would subtract 30 workers from the payment calculation.
  • Offers its full time employees coverage in minimum essential coverage under an employer plan and any full time employee is enrolled in an insurance exchange and receives a premium assistance credit or cost sharing.  Here, the employer offers health insurance coverage, but at least one employee decides to enroll in an exchange.
    • The monthly penalty is the LESSER of:
    • the  number of full time employees receiving a premium assistance credit or cost sharing for purchase of insurance through an exchange multiplied by 1/12 of $3,000.
    • the number of full time equivalent employees minus 30, multiplied by $2,000.

Bottom line:  if you are approaching 50 employees, make sure to consult with a tax practitioner to determine how much any additional employees will cost you.

If you have any questions on how this applies to your business, please feel free to give us a call.

Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230

 

How the New Health Care Law Affects Taxes on Over the Counter Medication

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There is a provision in the new Patient Protection and Affordable Care Act that changes the taxability of over the counter medications purchased through flexible spending arrangements (FSAs), health reimbursement arrangements (HRAs), Health Savings Accounts (HSAs) and Medical Savings Accounts (MSAs).  Basically, for HRAs and FSAs, you can no longer receive reimbursements to pay for over the counter medications.  For HSAs and MSAs, you can no longer take distributions to pay for over the counter medications.  If you do take a distribution from an HSA or MSA to pay for over the counter medications, the distribution is taxable and is subject to a 20% penalty.  These provisions became effective January 1, 2011.

ABCs of FSAs, HRAs, HSAs, and MSAs

An FSA (flexible spending account) is a savings account funded by employee pre-tax contributions.  The funds in the account can be used to pay for medical expenses on a pre-tax basis.  In some cases, FSAs may also be funded by employer contributions.  Amounts are contributed each year based on expected medical expenses.  Any amounts not spent during the year are forfeited.

An HRA (health reimbursement account) is a savings account funded by employer contributions on a pre-tax basis.  The employee is not allowed to contribute to an HRA.  The employee submits medical expenses and is reimbursed with pre-tax dollars.  Amounts not spent are carried forward (in contrast with an FSA where the funds are forfeited).

HSAs (health savings accounts) and MSAs (medical savings accounts) are used in conjunction with a high deductible health insurance plan.  MSAs were discontinued and replaced by HSAs.  HSAs and MSAs are savings accounts that can be funded with employee or employer contributions on a pre-tax basis.  Amounts can be withdrawn from these accounts tax-free if they are used to pay medical expenses.

Health Care Law Shows No Love for Over the Counter Medications

Effective January 1, 2011, expenses incurred for a medicine or drug will be treated as:

  • a qualifying reimbursement under a FSA or HRA or
  • a qualifying distribution from an HSA or MSA

for medical expenses only if such medicine or drug is a prescribed drug (determined without regard to whether such drug is available without a prescription) or is insulin.

Therefore, under the new law, expenses incurred for medicines or drugs may be paid or reimbursed by an employer provided plan or distributed from an HSA or MSA if the medicine or drug:

  • requires a prescription
  • is an over the counter medicine or drug and the individual obtains a prescription for it (this refers to the italicized and bold language in the preceding paragraph)
  • is insulin
I have been reading newspaper accounts of people calling their doctors to get prescriptions for over the counter drugs.  Doctors are swamped with these calls are are now requiring an appointment before they will issue such a prescription.  The cost of the doct

or visit exceeds the benefit of having a prescription that allows the tax benefit.

Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.

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