Small Business Tax Credit

Small business owners need every tax credit that they can get.  One tax credit that you are likely entitled to but may not know about is the Small Business Health Insurance Premiums tax credit.

For tax years 2010 through 2013, the federal income tax credit was worth a maximum 35% of premiums paid by small business employers.

Starting in 2014, the federal income tax credit is worth a maximum 50% of premiums paid by small business employers.

 

There are a few qualifications that you must meet in order to claim this credit:

1. Starting in 2014, the premiums must be paid on a qualified health plan offered through a Small Business Health Options Program (SHOP) Marketplace.
   
   In California, there are, currently, 6 health insurance companies that are available for year-round enrollment in the SHOP program.  To view the list of qualifying health insurance companies and the available plans, click here.
   
   
2. There must be fewer than 25 full-time equivalent employees.
   It is important to understand that this does not mean less than 25 employees.  The number of full-time equivalent employees is a calculated figure that is determined by taking the total number of hours worked by all non-owner employees and dividing that number by 2,080.  The resulting figure is then rounded down to the nearest whole number.
   
   For example, if you had 13 employees and they all worked for a total of 1,500 hours during the year, you would have 9 full-time equivalent employees (13 x 1,500 = 19,500; 19,500 / 2,080 = 9.38; 9.38 rounded down is 9).
   
   
3. The average wages must be less than $50,000.
   
   To determine this number, you divide the total wages of the non-owner employees by the number of full-time equivalent employees.
   
   For example, if you paid your employees a total of $390,000 during the year, you would have average wages per full-time equivalent employee of $43,333 ($390,000 / 9).
   
   
4. The health insurance premiums must be paid through a qualifying arrangement.
   To be considered a "qualifying arrangement", the employer must pay at least 50% of the single-coverage insurance for its employees.  The IRS has ruled that the employer does not have to pay for the premiums covering the employee's spouse or children.  Generally, an employer must pay a uniform percentage of the premium cost for each enrolled employee's health insurance coverage.  However, exceptions exist for businesses who utilize either composite billing (uniform premiums paid rather than a uniform percentage) or list billing (differences in premiums exist for each employee based upon age or other factors).

The maximum credit is for 50% of the premiums paid in 2014 (35% in prior years).  However, it may be less than 50% if: 1) there are more than 10 full-time equivalent employees; 2) the average wages exceeds $25,000; or 3) actual health insurance premiums exceed average premiums paid for health coverage in the employer's area.

This tax credit can be carried back or forward to other tax years. 

In addition to the tax credit, an employer is entitled to claim a deduction for the excess health insurance premiums.  For example, if an employer pays $10,000 in health insurance premiums and claims a $5,000 tax credit, the employer would be entitled to take a $5,000 deduction for the remaining health insurance premiums.

If you have any questions about the Small Business Health Insurance Premiums tax credit, or if you would need assistance in claiming this tax credit, please do not hesitate to contact me.

As always, I appreciate you leaving your feedback in the comments section below.

Business or Hobby?

Are you living the dream?  Do you have a business that you are passionate about and that you cannot wait to get back to everyday?  You may think it is a business, but the IRS may think that it is your hobby.

What is the difference?

The main difference is that you are entitled to deduct all the ordinary and necessary expenses associated with operating a business.  However, your hobby related expenses may not be deductible, and to the extent they are the deduction is limited.

There are 9 factors used to determine if the taxpayer is engaged in a business or a hobby.

1. Whether the activity was conducted in a business-like manner.  Basically, did you have a business plan and keep financial records?  Did you keep a separate bank account for the activity?  Are you doing the types of things that a prudent business person would do?
2. The taxpayer's expertise or that of his advisors.  You need to have sufficient expertise to show that you know how to make that activity profitable.
3. The time and effort expended.  Essentially, is this activity something that you do during your free time, or are you devoted to it full-time?
4. The taxpayer's expectation that assets used in the activity may appreciate in value.  If your hobby involves the accumulation of assets, like coin collecting, you must show that you purchased the assets with the intention of eventually selling them for a profit.  A coin collector who knows that the coins will go up in value but has no intention of ever selling his coins is involved in a hobby, not a business.
5. The taxpayer's success in similar or dissimilar activities.  If you have been very successful in related ventures, then even if this activity is losing money it is likely a business.  On the other hand, if all your similar activities have lost money it is more difficult to prove that you are engaged in the activity with the hope of making money.
6. The taxpayer's history of income or loss.  This is similar to the prior factor, except that it looks only at this one activity.  If you made consistent income in the past it is more likely to be considered a business than if you had only sporatic income or consistent losses.
7. The amount of occasional profits.  The more income you earn from the activity, the more likely it is that it will be considered a business.
8. The taxpayer's financial status.  If most of your income is derived from other sources, then this activity will look like a hobby.  On the other hand, if most of your income comes from this activity it looks like a business.
9. The personal pleasure the taxpayer derives from the activity. This is a subjective factor.  You can love your job (and I would hope that you do), but if it looks like that is a greater motivation for you than money it will likely be deemed a hobby.

Outside of these factors, there is a safe harbor available to taxpayers.  If the activity has been profitable for 3 out of the last 5 tax years, including the current year, then the IRS will presume that the activity is carried on for profit (i.e., that it is a business).  If you breed, show, train, or race horses, you only have to be profitable for 2 out of the past 7 years in order to qualify for this safe harbor.

If you need help determining whether you are engaged in a business or a hobby, or if you have any other questions related to this please do not hesitate to send me an e-mail.

As always, I appreciate any feedback you have.  Please leave it in the comments section below.