Tax Tips (and other stuff): Calculating the new small business health care credit

Well, for all you small business owners out there who have provided health insurance as a benefit for your employees, you can draw comfort from the fact that there is a new credit for you to claim.

Using the new IRS form 8941 and its instructions (you will need the instructions!), you can figure your health care credit.

In computing this credit, you don't count:

• The "Excluded Employee/Owner" of a sole proprietorship or

• Partner in a partnership

• Shareholder who owns more than 2 percent of an S corporation

• Shareholder who owns more than 5 percent of voting stock of a C corporation

• Family members who qualify as dependents on that owner's personal tax return.

Basically, if you follow the form, it walks you through coming up with a credit. Let's do one.

ABC Corporation paid $36,000 in health insurance premiums (not counting amounts paid for "excluded employee/owner"), which were more than 50 percent of the total premiums paid for each employee.

They have 14 employees, of which four are "excluded employee/owner" and their dependents who work at ABC Corp. The remaining 10 employees worked a total of 16,432 hours. Those 10 remaining employees' total gross wages are $295,000.

STEP 1: We have to figure out how many full-time equivalent (FTE) employees are in ABC Corp. This is computed by taking the total hours worked (16,432) and dividing that by 2,080. In our case, that comes out to 7.9. The IRS says we have to round down, so we end up with only 7 FTEs.

STEP 2: We need to figure the average annual wages (AAW) for ABC Corp. We do this by dividing the total gross wages of the employees (not counting the "excluded employees/owner" gross wages) by the FTEs. Thus, $295,000 divided by 7 equals $42,142.

STEP 3: We need to compute what the premiums would have been using the average premium for the small group market in Nevada. The IRS table says that amount is $4,553 per employee in 2010. Thus, we multiply $4,553 times our FTE of 7 and get $31,871.

STEP 4: We multiply the lesser of actual health insurance premiums ($36,000) or the amount computed in Step 3 ($31,871) times 35 percent (tax-exempts use 25 percent). The result is $11,155 ($31,871 x 35 percent).

STEP 5: We have to compute the limitation due to the AAW being higher than $25,000. This is done by coming up with a percentage of the wages over $25,000. ($42,142 minus $25,000, then divided by $25,000 equals 68.6 percent) Thus we must reduce the potential credit computed in Step 4 by 68.6 percent. $11,155 minus ($11,155 x 68.6 percent) equals $3,503. This is the potential credit to be used against any income tax liability for 2010. The unused balance may be carried forward.

The actual form and instructions total nine pages of small print. I hope I've simplified this for you.

• Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459.