Some Small Businesses Shut Out of Healthcare Tax Credit

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Some portions of the new healthcare law are just now kicking in, but a tax credit worth thousands of dollars has been on the books for months.

The IRS estimates some 65,000 small businesses in Tennessee are eligible for a healthcare tax credit. Companies can deduct up to 35 percent of health insurance costs. If they qualify, and if they’ve heard of it.

Despite a massive mail campaign done by the IRS, Jan and Karl Heinrich, owners H&H Design in Gallatin, had no idea they might qualify.

“What are you talking about?” says Jan Heinrich. “I don’t think, uh…we never got a postcard. I can tell you that,” she says.

Karl Heinrich of H&H Design didn’t know his small company might be eligible for a tax break on healthcare.

Heinrich laughs while leaning on the company’s white formica table in the breakroom. She and her husband know about federal tax credits. She says it’s what’s paying for 144 solar panels getting installed on their roof.

Eligible companies question credit’s rules

A crew of five from Lightwave Solar Electric must move a pile of rotting wood before hauling shoulder-high panels up to the Heinrich’s roof. Standing near a stack of shiny, white solar panels, electrician Rhodes Thompson shades his eyes, and says on jobs like these he’s grateful Lightwave offers health insurance.

“When you’re climbing on roofs and ladders you’re at a certain amount of risk, so it’s nice to have that, especially in the contracting sort of realm. There’s not a whole lot of health insurance provided by the employer. So, I feel pretty, pretty lucky,” he said.

Lightwave generously pays 85 percent of Thompson’s health insurance premium. That’s well above the 50 percent required to take advantage of the tax credit. The rules also require fewer than 25 employees, and salaries less than $50,000 a year. Lightwave does both. So, how much will they get back next year?

“In our case, we won’t even get a dime,” said Lightave CPA Christine Johnsnon.

Johnson says that’s because the company has 14 employees who earn on average $48,000 annually. Those two numbers are too close to the employee and income caps.

“If you have ten or less employees and your average wage is $25,000 dollars or less, you get the full credit, which is 35 percent of the premiums paid by the employer. But if you have more employees and your average wage is a little bit higher, then you have to phase out that credit,” said Johnson.

Joe Pizzini stablizes Lightwave Solar Electric’s trailer to unload the Heinrich’s solar panels.

Meeting the narrow requirements is the biggest complaint from the National Federation of Independent Business. They also criticize the credit for not including the self-employed.

A tax attorney from Bone McAllester says the same thing. Terry Mann conducts seminars on the healthcare tax credit. He’s says he’s the credit goes down below 35 percent “pretty quickly” and that most employers tell him they’re having trouble meeting the eligibility requirements.

“They’re too large or they pay their people too much, so it’s a very narrow segment of employers that can actually find dollar benefit here, but it’s worth looking into,” said Mann.

Attorney Terry Mann says healthcare tax credit regulations can be too narrow for some small businesses.

Small companies are looking into it. Blue Cross Blue Shield of Tennessee says it’s seen an uptick in calls about its small group health insurance plans.

One of those calls came from East Nashville’s Sweet 16th Bakery, owned by Dan and Ellen Einstein. The married couple runs the small corner shop, and usually sells out of their cupcakes, scones, and cookies before closing time at 2 p.m. Business is good, and they’ve hired three employees. Einstein looked into buying health insurance. According to its size and payroll, Sweet 16th was eligible for about a 30 percent tax credit. But Einstein says he can’t use it because health insurance is still too expensive.

“We looked at the tax break, we looked at our cash flow, and a small business works on small margins, I mean, you work on that every dollar every day, and unfortunately when you weigh all those factors out…it’s not affordable for a business of our size,” said Einstein.

Sweet 16th Bakery owners Dan and Ellen Einstein qualify but say they can’t use the healthcare tax credit.

Nashville Congressman Jim Cooper (D-Nashville) says this is one of the worst times to offer a tax credit to small businesses.

“Remember what small businesses have been through recently in our area. First of all, the toughest recession since the Great Depression; secondly, a near bank collapse, and third for most middle Tennessee businesses we also had the flood, and all that paperwork nightmare.”

Cooper voted for healthcare overhaul, and says the tax credit could be more straightforward. Companies have to wade through some 20 pages of regulations to see if they’re eligible.

The impact of the healthcare tax credit will be measured in April, when tax returns are due.

The National Federation of Independent Business has an online calculator to help companies determine if their eligibility for the small business healthcare tax credit.