More Information on the Small Business Health Care Credit
If you haven’t heard yet, small nonprofit employers may be eligible for a refundable credit to help offset the cost of health insurance premiums. This provision is part of the Affordable Care Act signed into law by President Obama earlier this year and covers tax year 2010. Read our earlier post about determining your eligibility and calculating your credit here: http://blog.nonprofitmaine.org/2010/09/17/update-on-the-health-care-tax-credit-for-nonprofits/
To clarify how nonprofits will claim this credit, I have been having an e-mail conversation with Shawn Savage, a very helpful IRS employee, located in Augusta.
“My number one burning question is how the heck are tax-exempt organizations going to claim the credit? If nonprofits are to deduct the credit amount from their payroll taxes, why are they being asked to file a form with the 990-T since that is not how payroll taxes are paid? Additionally, if they can calculate their credit now (form or no form), why not start withholding those payroll taxes now?”
“I reviewed the Small Business Health Care Tax Credit: Frequently Asked Questions page on irs.gov and would like to share these FAQs with you.
“18. How does a tax-exempt employer claim the small employer health care tax credit?
“A. A tax-exempt employer described in Code section 501(c) that is exempt from tax under Code section 501(a) claims the refundable credit by filing a Form 990-T with an attached Form 8941 showing the calculation of the claimed credit. A tax-exempt employer is not eligible to claim the credit unless it is an organization described in Code section 501(c) that is exempt from tax under Code section 501(a).
“21. Can a tax-exempt employer claim the credit if it has no taxable income for the year?
“A. Yes. For a tax-exempt employer, the credit is a refundable credit, so that even if the employer has no taxable income, the employer may receive a refund (so long as it does not exceed the income tax withholding and Medicare tax liability, as discussed in Q/A-6).
“24. May an employer reduce employment tax payments — withheld income tax, social security tax and Medicare tax — during the year in anticipation of the credit?
“A. No. The credit applies against income tax, not employment taxes.”
“So, to clarify #21 and #24 on the credit, the IRS will be sending lots of nonprofits a check to reimburse them for the payroll taxes they paid in 2010 up to the amount allowed in the credit, yes?” (The part about the credit applying against income tax, not employment taxes threw me.)
“I believe the answer to your question would be the credit applies against income tax, not employment taxes so “to reimburse them for payroll taxes they paid in 2010” may not be a most accurate statement. Although the credit is a refundable credit that they will be issued either by check, Direct Deposit, etc.
“Another area I want to make sure you are aware of is another Frequently Asked Question (FAQ) that was referenced in Question #21 below.
“6. What is the maximum credit for a tax-exempt qualified employer?
“A. For tax years beginning in 2010 through 2013, the maximum credit for a tax-exempt qualified employer is 25 percent of the employer’s premium expenses that count towards the credit, as described in Q/A-3. However, the amount of the credit cannot exceed the total amount of income and Medicare (i.e., hospital insurance) tax the employer is required to withhold from employees’ wages for the year and the employer share of Medicare tax on employees’ wages for the year. ”
So while the IRS uses the payroll taxes as a way to cap the amount of the credit, the credit officially is applied to income tax, whether or not you pay income tax. Bottom line: if you are eligible for a credit and you owe no income tax, the IRS at some point in 2011 will issue a refund to your organization either by check or direct deposit. Do not apply your credit by reducing the payments of your payroll taxes.
“The draft form 8941 that will accompany a new 990T is available online at: http://www.irs.gov/pub/irs-dft/f8941–dft.pdf and it invites comments, but I can’t find instructions as to how to make those comments. Can you advise?”
“I have been told that if anyone has comments on Form 8941, they can email them directly to the originator of the Form at: Neal.E.Dickman@irs.gov. They can also email them to Mr. Bill Woolf as well at: William.P.Woolf@irs.gov.”
“They welcome any comments from the public as it helps them improve the tax products.”
“Do you know when the draft for the new form 990T will be available?”
We’ll be sure to keep you posted as we learn more. In the meantime, feel free to call or e-mail us any comments or questions you may have.