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Health Care Reform Has Tricky Tax Implications

July 28, 2011

The health care reform law contains many complexities that tax practitioners need to be aware of, and waiting for it to be repealed isn’t going to solve any of those problems soon.

At a New York State Society of CPAs conference on tax planning for individuals on Thursday, tax consultant Arthur Auerbach talked about the tax implications of health care reform. While the Republican-controlled House voted to repeal health care reform earlier this year, the bill went nowhere in the Senate.

He noted that even if Republicans win control of the Senate in the next election, they still wouldn’t have a veto-proof majority to repeal health care reform, assuming that Obama is re-elected. “For those of you who are sitting here and praying that the health care reform bill will be repealed, it’s not going to happen,” he said.

However, he acknowledged that Republicans, particularly in the House, might succeed at cutting off funding for implementing the health care law.

In the meantime, he discussed several of the vagaries of the law that have already taken effect, including the Small Business Health Care Tax Credit. He asked if any of the CPAs in the room had tried to calculate the credit for any of their clients. Nobody raised their hands. Auerbach said he understood why.

“That’s a portion of the bill that’s unintelligible to humankind,” he said. “I defy anybody sitting here to perform that credit. If a client comes to you and asks you to do a calculation on this credit, the first thing to do is get an engagement letter. It’s going to take you two to three hours to do the calculation and you’ll get zero credit. I can’t tell you how many times that has happened in doing the calculation.”

However, he acknowledged that it’s easier to take advantage of the health care tax credits for small nonprofit organizations. He noted that he has direct experience working with such organizations.

“There was an 11th commandment when Moses came down from the mountain,” he explained. “If you join a not-for-profit organization and they find out you are a CPA, you will be made the treasurer. Been there, done that.”

He noted that small nonprofits can easily get a refundable health care tax credit if they are proving health care insurance for their employees, particularly those with 10 or fewer full-time employees.

Auerbach also discussed changes to flexible spending and health care savings accounts as a result of the law, along with the new 10 percent tax on tanning salons. He noted that there was a little-known exemption for the tanning tax for people with Vitamin D deficiencies. However, he doubted that the federal government is making much money from the tanning tax so far. As a member of the AICPA’s Health Care Task Force, he is anxious to find out what the revenues are from the tax.

During legislative negotiations over the bill, he recalled going to Washington to find out more about the 40 percent excise tax on so-called “Cadillac” health insurance plans.

“I went up on Capitol Hill and asked everybody what’s a Cadillac plan and they had no idea,” he said. “So what do you do? You collect the information.” However, he noted that for most employers the tax does not yet apply. “The Cadillac tax is no longer mandatory,” he said. “It’s now voluntary. For 2012 it will apply to anybody who has more than 250 employees, but it will be voluntary for anybody who has less than 250 employees.”

However, he added a caveat: The 250-employee number is determined by Section 414 of the Tax Code, which means that it includes all of the entities that the taxpayer has control over, including any limited liability companies and S corporations.

One part of the health care law that has been challenged by a number of state attorneys general is the part that imposes an individual mandate to buy health insurance or levies a fine on those who don’t buy insurance. Auerbach predicts the legal challenges will eventually be decided by the Supreme Court, but he believes that any decision on the individual mandate would not strike down the entire health care reform law.

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