The Income Tax Effects of Health Care Reform on Small Businesses and Real Estate Investors

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INTRODUCTION

IF REAL ESTATE INVESTORS AND SMALL BUSINESS OWNERS intend to maximize after-tax profits and maintain appropriate levels of capital investment, they must have a working knowledge of the latest legislative changes enacted by the United States Congress that pertain to real estate and to small businesses. On March 23, 2010, President Barack Obama signed into law the Patient Protection and Affordable Care Act, followed closely (March 30, 2010) by the Health Care and Education Reconciliation Act which amended the Affordable Care Act (hereafter collectively called the Act). These major pieces of legislation contain (in addition to many non-tax items) several new or modified tax provisions and amendments to the Internal Revenue Code. Several of the provisions of these new laws have implications for real estate investors and/or real estate transactions, as well as small businesses

The purpose of this article is to summarize the provisions of several of the important changes to the Internal Revenue Code that are now the law or that soon will become the law and that pertain to real estate transactions and small businesses. Investors and small business owners are urged to look closely at this new legislation to seek ways in which they can significantly diminish their future income taxes. The following discussions focus on the major provisions of the new bills which, directly or indirectly, affect real estate transactions and small businesses. Some suggestions for tax planning are also included in the discussions. To determine the particular effect, if any, each of these provisions will have on a particular investment, each investor should consult with a qualified CPA, tax attorney or other tax professional.

PENALTY ON EMPLOYERS THAT DON'T PROVIDE HEALTH CARE INSURANCE

Beginning in 2014, for employers with 50 or more full-time employees, the Act imposes a penalty on employers that don't offer coverage or offer coverage that pays less than 60 percent of health-related expenses. In determining whether a firm has 50 or more full-time employees, persons who work 30 or more hours per week are counted as full-time. In addition, the hours of part-time employees (for a month) are aggregated and divided by 120 to determine full-time equivalent employees. This computation is solely for purposes of assessing the penalty.

If an employer with 50 or more equivalent full-time employees fails to offer health insurance coverage to its full-time employees and their dependents, a penalty is imposed if at least one full-time employee is certified to the employer as having enrolled in health insurance coverage purchased through a state exchange for which a premium tax credit or cost-sharing reduction is allowed or paid to such employee. The penalty for having one employee enrolled in a subsidized program is $167 per month for every full-time equivalent employee beyond 30. The maximum penalty per year is $2,000 per full-time equivalent employee beyond 30. For example, if a firm employs 60 full-time equivalent employees and offers no health insurance coverage at all for the year, the penalty would be $60,000 (60 employees minus the 30 employee threshold times $2,000). Further, this penalty is not tax-deductible by the employer as an expense.

If an employer with 50 or more equivalent full-time employees offers health insurance coverage but the coverage offered pays less than 60 percent of health care costs, the employer is subject to a penalty if any full-time employee is certified to the employer as having enrolled in health insurance coverage purchased through a state exchange for which a premium tax credit or cost-sharing reduction is allowed or paid to such employee. In this case the penalty is not based on all employees, but it is imposed based on all employees who qualify for subsidized health insurance coverage and actually receive the credit or cost-sharing reduction mentioned above. …