The House Ways and Means Oversight Subcommittee held a hearing to discuss the relative unpopularity of the Small Business Health Tax Credit that is part of the health care reform law.
The hearing on Tuesday came in response to a report from the Treasury Inspector General for Tax Administration, which found that as of mid-May 2011, just over 228,000 taxpayers had claimed the credit, totaling more than $278 million in claims. The Congressional Budget Office had originally estimated that taxpayers would claim up to $2 billion worth of Small Business Health Care Tax Credits for tax year 2010 and the cost would be $37 billion over 10 years. The tax credit is intended to help small businesses afford the cost of health insurance, but many tax preparers have found it difficult to calculate and apply to their clients’ situations.
Subcommittee Chairman Charles Boustany, R-La., calls the tax credit “convoluted” and notes that it can only be applied in a “small number of cases.”
“When it was enacted as part of the President’s health care overhaul, supporters said the credit would provide access to affordable insurance and help small employers insure their employees,” he says. “Two years later, we see that the results do not match up to the promises. Instead, it is a convoluted tax credit that temporarily subsidizes the cost of employee health insurance in a very small number of cases. Employers must undertake complicated calculations to determine whether they even qualify for the credit — the instructions to the form are eight pages long… If employers are able to navigate the calculations and confirm they are eligible, they must limit additional hiring and employee compensation in order to keep it. Although the credit does not appear to be providing meaningful assistance to small business owners, it is still the IRS’s job to implement it and do so in a way that protects taxpayer dollars from erroneous payments.”
A representative from the American Institute of CPAs testified at the hearing that most small employers do not view the tax credit as an incentive to provide health insurance coverage to their employees.
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, says Patricia Thompson, chair of the AICPA’s Tax Executive Committee. “For many small employers, tax compliance costs were created without an offsetting benefit,” she adds.
“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 notes. “Many small employers felt the entire process was a fruitless effort or wasted expense.”
Congress passed the tax credit as part of the Patient Protection and Affordable Care Act in 2010 to encourage small businesses and small tax-exempt organizations to provide health insurance coverage for their employees.
To improve the tax credit, Thompson recommends changing 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, or as an alternative, to increase the count of so-called “full-time equivalent employees.” The current definitions used to determine eligibility for the credit are not straightforward or consistent with other provisions of the Tax Code, she points out. The AICPA also recommends eliminating the phase-out calculations for the employee count and the annual salary, as they make the credit difficult to apply and require numerous calculations before determining the amount of credit available.
National Small Business Association president Todd McCracken also testified during the hearing, and pointed to various problems with the tax credit, including its complexity, the fact that it is a temporary and nonrefundable credit, and its exclusion of self-employed individuals.
“While the goal of this tax credit was a good one, the reality is that it provides little help to most small businesses,” says McCracken. “At the end of the day, the number one issue for small employers is cost — something the overall bill failed to truly address.”
According to a report by the NSBA, as of the middle of this year only 19% of small businesses say they have a clear understanding of how the new law would affect their business. The uncertainty of the law itself and the complexity of the tax credit are probably driving the very low adoption rate of the credit so far.
“Beyond its complexity is a flaw in the credit that excluded critical groups of small businesses and their employees,” says McCracken. “Both self-employed individuals and family members who work for the small-business owner are ineligible for the credit — two huge constituencies in the small-business community.”
Alliantgroup national managing director Dean Zerbe, a former senior counsel and tax counsel to the Senate Finance Committee, says the tax credit had many flaws. He did not testify during the hearing, but he is still in close touch with his former colleagues on Capitol Hill and with accountants.
“I just got an earful on the Small Business Health Tax Credit from accountants,” he says. “They were just really hitting me on how it is very cumbersome and really unworkable for their clients. I’d done the numbers and I didn’t feel it was going to help very much beyond lemonade stands. But it was interesting to me to hear how they found it really just a dog’s breakfast in terms of trying to make it workable for their clients. At the end of the day, it just wasn’t worth it. They’d go through all these calculations and figures and find out the guy was going to get $600 or something like that. They were not big fans of it.”
Nevertheless, a number of small businesses have benefited from the credit, as the TIGTA report showed. One small business that did find the credit useful was Home ReSource, a building materials reuse center in Missoula, Mont. Matthew Hisel, co-director of the company, testified at the hearing that the tax credit had helped his business deal with skyrocketing health insurance premiums. “For 2010, when we paid $10,782 for health insurance, this credit cuts our costs by more than $2,000,” he says. “For a small business struggling to maintain decent health coverage, that makes all the difference. We were actually considering dropping our health insurance this year, but the tax credit tipped the balance and helped us maintain our coverage. And we anticipate receiving the credit for the next several years as a bridge to a reformed insurance marketplace in 2014.”
Sarah Hall, commissioner of the IRS’s Tax-Exempt and Government Entities Operating Division, told the subcommittee that the IRS plans to expand its outreach efforts to inform more small businesses about the tax credit over the next year. The IRS mailed postcards about the tax credit in 2010 to more than 4 million small businesses and tax-exempt organizations, and created detailed guidelines, YouTube videos and workshops. The new outreach campaign will focus on partners such as the tax software industry and practitioners, along with insurance agents and brokers who work with small businesses.
Michael Cohn writes for Accounting Today, a SourceMedia publication.
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