By Shelby L. Stenson
The Daily Record Newswire
The IRS recently released a draft version of the form small businesses and tax-exempt organizations will use to calculate the small business health care tax credit when income tax returns are filed next year.
The IRS also announced how eligible tax-exempt organizations, which generally do not file returns, will claim the credit during the 2011 filing season.
A draft of Form 8941 is posted on the IRS website. Small businesses and tax-exempt organizations will use the form to calculate the credit. A small business then will include the credit amount as part of the general business credit on its income tax return.
Tax-exempt organizations instead will claim the small business health care tax credit on a revised Form 990-T, which is currently used by tax-exempt organizations to report and pay the tax on unrelated business income. Form 990-T will be revised for the 2011 filing season to enable eligible tax-exempt organizations — even those that owe no tax on unrelated business income — also to claim the small business health care tax credit.
The final version of Form 8941 and its instructions will be available later this year, according to the agency.
The small business health care tax credit was included in the Affordable Care Act signed by President Barack Obama in March and is effective this year. The credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have.
In 2010, the credit generally is available to small employers that contribute an amount equivalent to at least half the cost of single coverage towards buying health insurance for their employees. The credit is targeted specifically to help small businesses and tax-exempt organizations that primarily employ moderate- and lower-income workers.
For tax years 2010 to 2013, the maximum credit is 35 percent of premiums paid by eligible small business employers and 25 percent of premiums paid by eligible employers that are tax-exempt organizations.
Beginning in 2014, the maximum tax credit will go up to 50 percent of premiums paid by eligible small business employers and 35 percent of premiums paid by eligible, tax-exempt organizations for two years.
The maximum credit goes to smaller employers — those with 10 or fewer full-time equivalent employees — paying annual average wages of $25,000 or less.
The credit is completely phased out for employers with 25 or more, or which pay average wages of $50,000 or more per year. Because the eligibility rules are based in part on the number of FTEs, not simply the number of employees, businesses that use part-time help might qualify even if more than 25 individuals are employed.
The IRS also issued guidance reflecting statutory changes regarding the use of certain tax-favored arrangements, such as flexible spending arrangements, to pay for over-the-counter medicines and drugs.
The Affordable Care Act established a new uniform standard that, effective Jan. 1, 2011, applies to FSAs and health reimbursement arrangements. Under the new standard, the cost of an over-the-counter medicine or drug cannot be reimbursed from the account unless a prescription is obtained. The change does not affect insulin, even if purchased without a prescription, or other health care expenses such as medical devices, eyeglasses, contact lenses, co-payments and deductibles.
The new standard applies only to purchases made on or after Jan. 1, 2011, so claims for medicines or drugs purchased without a prescription in 2010 still can be reimbursed in 2011, if allowed by the employer’s plan.
A similar rule goes into effect on Jan. 1, 2011 for Health Savings Accounts and Archer Medical Savings Accounts. Employers and employees should take the changes into account as health benefit decisions are made for 2011.
Shelby L. Stenson, CPA, is a partner with Mengel, Metzger, Barr & Co. LLP and may be reached at sstenson@mmb-co.com.
