Small Business Tax Credit Flop

Why wouldn’t you take advantage of a tax credit for small businesses? In the case of health care tax credit enacted in the 2010 Affordable Care Act, the answer is if it is too confusing or if the cost to receive it is more than the credit is worth.

This health care tax credit was supposed to be helping millions of small business to be able to provide health insurance for employees, paying out a budgeted $2 billion dollars on tax returns for 2012. Instead, as the Government Accountability Office reports, only 170,300 companies out of the 1.4 million to 4 million that were eligible claimed the credit last year. The average credit: $2,700.

The health care tax credit is for small businesses with 25 or less full-time employees paying average salaries of $50,000 or less. The employers must cover at least half of their insurance premiums, and the credit pays 35% of the premiums. Non-profits can get up to 25% off the insurance premium costs.

According to the report, small business owners interviewed said that the process to apply was too complex, and the benefit of the tax credit would not offset the time and cost of applying. The data required to apply, including employee hours and annual wage averages, was not readily available for these businesses. Business tax preparers estimate that is can take 2–8 hours for an employer to gather this information, then another 3–5 hours for a tax settlement specialist to calculate the credit.

The future of this tax credit remains to be seen. It has drawn criticism from many sources, including President Obama, who suggested simplifying and expanding the credit. Steve Miller, the IRS Deputy Commissioner, said that “significant outreach” had been conducted by the IRS to small businesses regarding the credit. The Treasury Department said that new tax credits can take time to become popular and there are plans for the IRS to ramp up outreach. The tax credit program has been challenged for its constitutionality, so the Supreme Court, expected to rule on the issue next month, could decide to do away with the credit altogether.

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