Friday, May 7, 2010

Small Business Tax Credit

One of the first health care reform provisions to go into effect under the Patient Protection and Affordable Care Act is the new small employer health insurance credit for small businesses that provide health care coverage to their employees.

This credit is worth up to 35% of eligible insurance premiums. The IRS announced that it will be sending postcards to more than 4 million business and not-for-progit organizations to inform them of the new credit.

Eligibility Qualifications for 2010:

  • Have a maximum of 25 full time employees for the year*

  • Pay no more than $50,000 annual wage per full time employee

  • Pay at least 50% of the health insurance premiums on a qualifying plan.

* Full time employees are determined by the IRS term FTE (Full Time Equivalent) Employees. For purposes of the small business credit, FTE employees means a number of employees equal to the number determined by dividing:

  1. The number of total hours of service for which wages are paid by the employer to nonseasonal employees during a taxable year, by

  2. 2080

  3. The result is rounded down to the next whole number to determine the number of FTE employees.

Do Not count more than 2080 hours for any employee, and don't count any employees that fall into the following categories:

  • Business owners - including: sole proprietors, LLC members, 5% or more owners in a C corporation, partners in a partnership, 2% shareholders in an S corporation

  • Family members of the individuals listed above

  • Employees that are considered seasonal employees.

We will discuss this new tax credit in detail in our next post.

Tuesday, May 4, 2010

California offers a New Home and First-Time buyer Credit

Beginning May 1, 2010, Californians who purchase a new home and California first-time home buyers can qualify for one of two state tax credits.

Only one of the credits may be claimed per taxpayer, and there are some general guidelines:
  • The home must be a principal residence; rental and investment properties don't qualify.
  • The home must be purchased on or after May 1, 2010 and before January 1, 2011.

    However, a binding contract entered into by December 31, 2010 may also qualify if the escrow closes by August 1, 2011.

    Also, if you enter into a contract before May 1, 2010, you may also qualify if escrow closes on or after May 1, 2010.
  • The credit is 5% of the purchase price of the home up to a maximum of $10,000.
  • Unlike the federal credit, the California credit is nonrefundable (can't reduce the taxpayers tax liability below zero) and must be claimed in equal amounts over 3 successive tax years. No more than one-third of the credit may be claimed in any one year.

    This tax can't be carried back or forward, so if your tax liability for one year is already at zero, you can't 'hold' your credit and apply to a different year.

There is a limit to how much money the California government is willing to spend. There is a cap of $100 million for the New Home Credit and $100 million for the First-Time Buyer Credit. So if they run out of funds before you purchase your house, you are out of luck.

Check the state website for updates regarding these limits. Once the funds are completely allocated, home buyers will no longer be issued a Certificate of Allocation. This certificate is required to claim the tax credit on a California income tax return.