The tax credit designed to encourage small businesses and tax-exempt organizations to provide health insurance coverage for employees is too complicated, according to witnesses who testified before a congressional panel on Thursday, November 17, 2011. The IRS had estimated that the credit would apply to 4 million businesses and tax-exempt organization. However, as of mid-October 2011, only 309,000 taxpayers had claimed the credit.

The credit is complex, and employers are having difficulty determining whether they are eligible for it. To receive the credit, which offsets up to 35% of an employer’s health insurance premium costs, the employer must have 25 or fewer full-time equivalent employees who earn average wages of $50,000 or less. Phaseout rules apply as well. The credit increases to 50% of premium costs in 2013.

Recommendations to improve the tax credit include the following:

  • Change the definition of a small business so that it is based on either gross receipts or the employee count from the prior year or the prior two years.
  • Increase the count number of full-time equivalent employees.
  • Make definitions used to determine eligibility more straightforward and consistent with other tax provisions.
  • Eliminate the phaseout calculations for the employee count and annual salary. The phaseouts make the credit difficult to apply and require numerous calculations.

Click here to view the complete Journal of Accountancy article.

Closely held businesses are the backbone of MCB’s success. We understand the pressures you face today. We work together with our clients as accounting, business, and tax advisers to navigate the current economic difficulties. Contact an MCB adviser for your tax and accounting needs at or 703.218.3600 to start building a relationship with a CPA firm who strives to earn your RESPECT and CONFIDENCE as a TRUSTED business adviser.

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