Small Business Health Insurance Tax Credit should be Simplified, AICPA Testifies

January 9, 2012

Most small employers did not view the small business health insurance tax credit as an incentive to provide health insurance coverage because they did not know until the end of the year or even later when they prepared their tax returns if they were eligible for the credit, Patricia Thompson, CPA, chair of the Tax Executive Committee of the American Institute of CPAs, told a U.S. House of Representatives panel on Nov. 15, 2011.

“It was not uncommon this year [2011] for tax preparers to have spent up to 20 percent of the time necessary to prepare an entire small business return just on the credit calculation, only to learn that the client did not qualify for the credit,” Thompson testified at a hearing held by the House Ways and Means Oversight Subcommittee.  “Many small employers felt the entire process was a fruitless effort or wasted expense.”

Small employers “are perplexed about how the tax law applies to them,” Thompson said, and “for many small employers, tax compliance costs were created without an offsetting benefit.”

Congress passed the tax credit as part of the Patient Protection and Affordable Care Act in 2010 in order to encourage small businesses and small tax exempt organizations to provide health insurance coverage for their employees.

Based on CPAs’ experience with the credit, Thompson made the following recommendations, among others, to improve the tax credit:

  • Change the definition of a small business so it is based on either gross receipts or the employee count from the prior year or the average of the prior two years.  Alternatively, increase the count number of full time equivalent employees.  The current definitions used to determine eligibility for the credit are not straightforward or consistent with other provisions of the Internal Revenue Code.
  • Eliminate the phase-out calculations for the employee count and the annual salary.  The phase-outs make the credit difficult to apply and require numerous calculations before determining the amount of credit available.

Thompson said the AICPA does not have a position either for or against the credit, but adoption of the AICPA’s recommendations to modify the tax credit would add simplicity and transparency, which are two of the AICPA’s guiding principles for sound tax policy.