LEXINGTON Buried in the mounds of pages of healthcare reform legislation is a tax credit available for certain small employers providing health insurance coverage for their employees. The credit is specifically targeted to help certain small businesses, including medical practices, reduce their costs to provide health insurance coverage to employees. Several medical practices we work with have qualified for this tax credit, and we have used it to save them thousands of dollars. Even though the calculation is time consuming, we have found significant tax savings that more than offset the costs and effort required by practices to calculate the credit.
In our experience, this credit is most beneficial in a practice where all the physicians are owners and the practice has two or fewer mid-level providers. Because owners are excluded from the calculation, their wages are not taken into account for this credit. However, one or two full-time physicians, or even several mid-level providers that are not owners, can cause the average wages of the practice to rise above the $50,000 average wage eligibility threshold, and thus phase out any available credit.
Through the end of 2013, the amount of the credit is generally 35% of the employer’s non-elective contributions toward the employees’ health insurance premiums. The amount of the credit is subject to a phase-out. An eligible small employer qualifying for the credit has to meet all of the following requirements:
(1) The employer employs no more than 25 full-time equivalent (FTE) employees for the tax year. Owners are not considered employees for this requirement.
(2) The average annual wages of the employees cannot exceed $50,000 for the tax year. Again, owner wages are not considered in this calculation.
(3) The employer has to contribute at least 50% of the premiums for the employees’ health insurance coverage on a uniform basis.
The credit in Action
A medical practice (a PLLC taxed as a partnership) has two physician-owners (who are excluded from the calculation) and 10 full-time staff, including front office and clinical. Total 2011 wages for the staff are $350,000, giving average wages of $35,000. The practice pays 75% of the single-coverage premium costs and requires the staff to pay the other 25% and any additional coverage (children, spouse, or family). The amount paid by the practice for premiums totals $40,000 (excluding coverage for owners). This amount is multiplied by 35% to determine the potential credit of $14,000. Because the practice has 10 or fewer FTE employees, it is not subject to the FTE phase-out. Since the average wages exceeded $25,000, there is a partial phase-out of the credit. After factoring in the average wage phase-out, the credit works out to be $8,400. Each of the physician-owners will have a $4,200 tax credit that will reduce their federal individual income tax, which may allow them to each keep an additional $4,200 in their pockets.
As you can see, this credit can really make a difference for certain practices. If you are a small practice owner and are paying at least 50% of the single coverage premium cost for your employees, you should be discussing the applicability of this tax credit to your practice with your tax preparer. Otherwise, you could be paying more taxes than required. Please note that the IRS will not notify you of the omission of this credit on your tax return and the related tax refund that may be due to you.
L. Porter Roberts, Jr., CPA, and Matthew S. Smith, CPA, CFE, are with the Medical Services Group of Barr, Anderson & Roberts, PSC, in Lexington, KY. If you would like more information, they can be reached via email at lproberts@barcpa.com and msmith@barcpa.com and via telephone at (859) 268-1040.