Witnesses Tell Congressional Subcommittee Small Business Health Tax Credit Is Too Complicated

A tax credit enacted to encourage small businesses and tax-exempt organizations to provide health insurance coverage for employees is too complicated and is not meeting its goal, witnesses told a congressional panel on November 15.

The credit, passed as part of the Patient Protection and Affordable Care Act, P.L. 111-148, in 2010, was estimated by the Congressional Budget Office to cost $37 billion over 10 years and apply to approximately 4 million businesses and tax-exempt organizations. As of mid-October, only 309,000 taxpayers had claimed the credit, totaling $416 million versus the $2 billion anticipated for the tax year. To receive the credit, which offsets up to 35% of the employer’s health insurance premium costs, an employer must have 25 or fewer full-time-equivalent employees who earn average wages of $50,000 or less. The credit increases to 50% of the premium costs in 2013.

The credit is so complex that small employers “are perplexed about how the tax law applies to them,” and they cannot quickly or easily evaluate whether they are eligible for the credit, Patricia Thompson, chair of the AICPA’s Tax Executive Committee, told the House Ways and Means Oversight Subcommittee.

“It was not uncommon this year for tax preparers to have spent up to 20% of the time necessary to prepare an entire small business return just on the credit calculation, only to learn that the client did not qualify for the credit,” Thompson testified

She and other witnesses credited the IRS for its outreach to taxpayers to educate them about the credit and provide guidance—the Treasury Inspector General for Tax Administration gave the agency a B or B+. However, the existence of other incentives creates “white noise,” said Todd McCracken, president of the National Small Business Association, making it difficult to get business owners’ attention.

Some of the committee Democrats defended the credit, saying it was too early to say the credit is not working, and they pointed to proposed cuts to the IRS’ budget as part of the problem. Committee member Jim McDermott, D-Wash., questioned whether the credit was in fact difficult, as one of the witnesses said he did not have a problem with it.

Thompson said that the challenge is less for tax preparers than it is for the small business owner, whose task of gathering and analyzing the information is “more than taking one number and putting it somewhere else.” One of the challenges is determining whether seasonal workers’ hours can be counted toward the credit because they are treated differently under the law than other workers.

Based on CPAs’ experience with the credit, Thompson made the following recommendations, among others, to improve the tax credit:

  • Change the definition of a small business so it is based on either gross receipts or the employee count from the prior year or the average of the prior two years. Alternatively, increase the count number of full-time-equivalent employees. The current definitions used to determine eligibility for the credit are not straightforward or consistent with other provisions of the Internal Revenue Code.
  • Eliminate the phaseout calculations for the employee count and the annual salary. The phaseouts make the credit difficult to apply and require numerous calculations before determining the amount of credit available.
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