Fall 2010

Health Care Reform Act

The recently enacted health care reform legislation includes both historic changes to the health care industry, as well as, some tax related provisions . This legislation is complex and includes many changes for both individuals and businesses. The following is a summary by year of some of the major changes (for a printable copy of this article click here):

2010

• Effective for plan years beginning after 9/23/2010, plans that provide dependent coverage must extend coverage to adult children (married or unmarried) up to age 26. Certain limited exceptions for grandfathered plans.

• For plan years beginning after 9/23/2010, pre-existing condition exclusions for children under 19 are prohibited.

• For plan years beginning after 9/23/2010, preventative care must be covered with no cost-sharing if provided through an in-network provider. Grandfathered plans are not required to comply with this requirement.

• Provide a $250 rebate (nontaxable) to Medicare beneficiaries who reach the Part D coverage gap in 2010 and gradually eliminate the Medicare Part D coverage gap by 2020.

• Provide tax credits to employers with no more than 25 employees with average annual wages under $50,000 who provide health insurance for employees. Phase-out between 11 and 25 employees and/or $25,001 and $50,000 average annual wages. Credit (before phase-out) is equal to 35% of the lesser of: a) total non-elective contributions made by the employer for qualifying health coverage, or b) amount employer would have paid if health plan premiums were equal to the average premium for the small group market in the state. This credit increases to 50% in 2014. For Non-Profits, the credit is 25%. Employer must pay at least 50% of the premium.

2011

• Exclude the costs for over-the-counter drugs not prescribed by a doctor from being reimbursed through an HRA, FSA, HSA or MSA. This does not apply to items for medical care, such as crutches or diabetes care.

• Increase the penalty to 20% on nonqualified distributions from an HSA or an MSA.

• Simple Cafeteria Plan - employers with fewer than 100 employees may set up pre-tax medical expense plans for employees. Contribution requirements by employers - either Uniform Percentage (not less than 2% of employees’ compensation) or amount equal to the lesser of 6% of employees compensation or 2 times the amount of employee contributions. Employee eligibility limits – must work at least 1,000 hours per year. May exclude employees under age 21, union employees, nonresident aliens, and employees with less than one year of service.

2012

• Increase Medicare Tax on Wages - an additional 0.9% tax imposed on wages for individuals with adjusted gross income over $125,000 if filing married filing separate, $250,000 if filing married filing joint, and $200,000 for all others.

• Increase Medicare Tax on Self-employed Income - an additional 0.9% tax imposed on self-employment income in excess of $125,000 if filing married filing separately, $250,000 if filing married filing jointly, and $200,000 in all other cases.

• Form W-2: Employers will be required to report the value of premiums paid on the employee’s W-2 for Form W-2s due January 2013. This amount is NOT taxable to the employee.

• Expanded Form 1099 reporting of all payments totaling in excess of $600 to all for-profit companies (begins with payments in 2012 reportable on Forms 1099 issued in January 2013). This includes payments for rents, salaries, wages, services, and amounts in consideration for property, premiums, annuities, and gross proceeds. Employers need to obtain each payee’s Federal tax identification number.

2013

• The maximum amount reimbursable under a health-care flexible spending account ("FSA") offered through a cafeteria plan will be reduced to $2,500.

• Additional 3.8% tax is imposed on the lesser of (i) unearned income or (ii) modified adjusted gross income over $125,000 for married filing separate taxpayers, $250,000 for married filing joint taxpayers, and $200,000 for all others. Unearned income includes interest, dividends, capital gains, annuities, rents and passive activity income. It does not include distributions from retirement plans and tax-exempt interest.

• Increase the threshold for the itemized deduction for unreimbursed medical expenses from 7.5% of AGI to 10% of AGI for regular tax purposes. The old 7.5% AGI limit is maintained for individuals age 65 and older (2013-2016).

• Mandated reporting for large employers (50 or more full-time employees), beginning June 30, 2013. These employers will be required to submit a return detailing employee data, status, and health benefits.

2014

• Annual limits on covered medical expenses prohibited for all insurance policies.

• Pre-existing conditions exclusions are prohibited for all.

• Refundable Tax Credit - eligible taxpayers can use this credit to help cover the cost of health insurance premiums for individuals and families who purchase health insurance through a state health benefit exchange. Eligibility for the credit is based on the individual’s income for the tax year ending two years prior to the enrollment period. The credit is available for individuals (single or joint filers) with household incomes up to 400% of the federal poverty level who do not receive health insurance through an employer.

• Require U.S. citizens and legal residents to have qualifying health coverage. Penalty phased in between 2014 – 2016. Penalty maximum $695 for singles or $2,085 families. Exemptions available. Those below income tax filing limit not subject to penalty.

• A nondeductible penalty is assessed on large employers (50 or more full-time employees) that do not offer coverage and have at least one full-time employee who receives a premium tax credit or cost sharing reduction. The excise tax is equal to $2,000 per full-time employee, excluding the first 30 employees from the assessment. Large employers that offer coverage but have at least one full-time employee receiving a premium tax credit, will pay the lesser of $3,000 for each employee receiving a premium credit or $2,000 for each full-time employee, excluding the first 30 employees from the assessment. This also requires employers with more than 200 employees to automatically enroll employees into health insurance plans offered by the employer. Employees may opt out of coverage.

2018

• Cadillac Tax on high-cost employer-sponsored health coverage - a 40% non-deductible excise tax will be levied against insurance companies and plan administrators for any health coverage plan to the extent that the annual premium exceeds $10,200 for singles, $27,500 for families.

In addition to the implementation of these new rules, state health care exchanges will be available to individuals and small groups to assist in selecting health care coverage and evaluating the various plans. There will also be federal high risk pool insurance plans for those who qualify. Finally, there are new measures being developed to help curb health care costs and make health care insurance industry more transparent to the consumer.

Small Business Jobs Act of 2010

The recently enacted 2010 Small Business Jobs Act includes a wide-ranging assortment of tax breaks and incentives for businesses. Here's a brief overview of the tax changes in the Small Business Jobs Act. (For a printable copy of this article click here.)

Enhanced small business expensing (Section 179 expensing). To help small businesses quickly recover the cost of capital outlays, small business taxpayers can elect to write off these expenditures in the year they are made instead of recovering them through depreciation. Under the old rules, taxpayers could generally expense up to $250,000 of qualifying property—generally, machinery, equipment and software—placed in service in during the tax year. This annual limit was reduced by the amount by which the cost of property placed in service exceeded $800,000. Under the Small Business Jobs Act, for tax years beginning in 2010 and 2011, the $250,000 limit is increased to $500,000 and the investment limit to $2,000,000. The Small Business Jobs Act also makes certain real property eligible for expensing. Thus, for property placed in service in any tax year beginning in 2010 or 2011, the $500,000 amount can include up to $250,000 of qualified leasehold improvement, restaurant and retail improvement property.  

Extension of 50% bonus first-year depreciation. Before the Small Business Jobs Act, Congress already allowed businesses to more rapidly deduct capital expenditures of most new tangible personal property placed in service in 2008 or 2009 by permitting the first-year write-off of 50% of the cost. The Small Business Jobs Act extends the first-year 50% write-off to qualifying property placed in service in 2010.  

Boosted deduction for start-up expenditures. The Small Business Jobs Act allows taxpayers to deduct up to $10,000 in trade or business start-up expenditures for 2010. The amount that a business can deduct is reduced by the amount by which startup expenditures exceed $60,000. Previously, the limit of these deductions was capped at $5,000, subject to a $50,000 phase-out threshold.  

100% exclusion of gain from the sale of small business stock. Ordinarily, individuals can exclude 50% of their gain on the sale of qualified small business stock (QSBS) held for at least five years (60% for certain empowerment zone businesses). This percentage exclusion was temporarily increased to 75% for stock acquired after Feb. 17, 2009 and before Jan. 1, 2011. Under the Small Business Jobs Act, the amount of the exclusion is temporarily increased yet again, to 100% of the gain from the sale of qualifying small business stock that is acquired in 2010 after September 27, 2010 and held for more than five years. In addition, the Small Business Jobs Act eliminates the alternative minimum tax (AMT) preference item attributable to such sales.  

General business credits of eligible small businesses for 2010 get five-year carryback. Ordinarily, a business's unused general business credits can be carried back to offset taxes paid in the previous year, and the remaining amount can be carried forward for 20 years to offset future tax liabilities. Under Small Business Jobs Act, for the first tax year of the taxpayer beginning in 2010, eligible small businesses can carry back unused general business credits for five years instead of just one. Eligible small businesses are sole proprietorships, partnerships and non-publicly traded corporations with $50 million or less in average annual gross receipts for the prior three years.  

General business credits of eligible small businesses not subject to AMT for 2010. Under the AMT, taxpayers can usually only claim allowable general business credits against their regular tax liability, and only to the extent that their regular tax liability exceeds their AMT liability. A few credits, such as the credit for small business employee health insurance expenses, can be used to offset AMT liability. The Small Business Jobs Act allows eligible small businesses to use all types of general business credits to offset their AMT in tax years beginning in 2010.  

Deductibility of health insurance for the purpose of calculating self-employment tax. The Small Business Jobs Act allows business owners to deduct the cost of health insurance incurred in 2010 for themselves and their family members in calculating their 2010 self-employment tax.  

Cell phones no longer listed property. This means that cell phones can be deducted or depreciated like other business property, without onerous recordkeeping requirements.  

S corporation holding period for appreciated assets shortened to five years. Generally, a C corporation converting to an S corporation must hold onto any appreciated assets for 10 years or face a built-in gain tax at the highest corporate rate of 35%. The 2010 Small Business Jobs Act temporarily shortens the holding period of assets subject to the built-in gains tax to 5 years if the 5th tax year in the holding period precedes the tax year beginning in 2011.  

Form 1099 reporting for rental property expense payments.

Under the Small Business Jobs Act, recipients of rental income from real estate generally will be subject to the same information reporting requirements as taxpayers engaged in a trade or business. Effective for payments made after December 31, 2010, rental income recipients making payments of $600 or more to a service provider (e.g., a plumber, painter, or accountant) in the course of earning rental income now will have to provide a Form 1099-MISC to the IRS and to the service provider.