This month’s edition of The CPA Journal featured an updated article examining ways to minimize the negative tax consequences for small businesses. Here’s what you need to know.
Employers with 50 or more full-time employees (or the equivalent number of part-time employees) that fail to comply with the law will be penalized. The law considers those who work 30 or more hours each week as full-time employees. If your business utilizes part-time employees, you would need to aggregate a month’s worth of the part-time employees’ hours and then divide by 120 to determine the full-time equivalent.
The penalty applies if these employers fail to offer health insurance coverage or if their coverage pays less than 60% of healthcare costs and if at least one full-time employee has enrolled in health insurance coverage purchased through a premium tax credit or cost-sharing reduction state exchange. The total amount of the penalty is based on the number of employees who qualify for the subsidized insurance and who receive the credit or reduction. The penalty is $250 per month for each employee who fits that category. There’s a maximum cap of $3,000 per year per full-time equivalent employees above 30 employees. Penalties aren’t tax-deductible.
Penalties won’t be assessed until 2015, so strategies can be formed now for 2014 to minimize the impact for employers.
Excise Tax on “Cadillac Plans”
If an employee is covered under employer-sponsored insurance and there is excess benefit, the employer is subject to a new excise tax. The amount of the tax is calculated using the total cost of insurance and related coverage (paid either by the employer or the employee). The tax applies to total cost amounts exceeding $10,200 (or $27,500 for family or spousal coverage). The amount of the tax is 40% of the excess benefit amount. Certain employees have higher thresholds, such as older, qualified retirees and employees in high-risk occupations.
This excise tax will apply beginning in 2018 and is adjusted for inflation.
Small Business Tax Credit
A tax credit is available to small businesses who offer coverage. Those with 25 or fewer full-time employees who have average annual wages of $50,000 or less can take a credit of up to 50% of the amount they contribute toward their employees’ premiums. Employers with 10 or fewer employees with average annual wages of $25,000 or less can take a credit of up to $100%.
The credit is available in 2014 and is indexed for inflation.
Tax on Net Investment Income
Individual taxpayers (as well as estates and trusts) that have certain types of net investment income higher than set amounts are subject to a Medicare tax of 3.8%. Net investment income is considered the sum of gross income from rent, royalties, interest, dividends, and annuities, minus any allowable deductions. Businesses that involve a passive activity or those that buy and sell financial products or commodities, as well as net gains from the disposition of property other than that held by a business, also falls into the net income category.
The tax applies to either the amount of the individual’s modified adjusted gross income that exceeds a certain amount ($250,000 for married filing jointly, $125,000 for married filing separately, and $200,000 for all others) or the individual’s net investment income for the year, whichever is less.
For estates and trusts, the tax applies to either the amount of their undistributed net investment income or their AGI exceeding threshold amounts, whichever is less.
A variety of strategies can be employed to avoid being classified in a net investment income category.
The law contains a variety of other provisions which also may affect taxpayers of certain types, including a Medicare tax that applies to some taxpayers, an itemized deduction phaseout that applies to some taxpayers, and a limitation on the amount that can be expensed for depreciable property.
If you’re wondering how to best plan your 2014 tax year to minimize the impact of these changes, give me call and we’ll set up a time to talk through strategies.