The recently enacted Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, relies heavily on new tax provisions in the Internal Revenue Code to implement many of the goals of health care reform. The effective dates for many of these tax provisions are delayed - some do not take effect until 2013, 2014 or even 2018.
However, several of the provisions have an immediate impact. Perhaps as an effort to help increase the popularity of the legislation, many of the provisions with the earlier effective dates are taxpayer-friendly provisions, while many of the penalty provisions and revenue-raising provisions have delayed effective dates.
This column will focus on those tax provisions of the health care legislation that have effective dates in 2009 and 2010 and thus are of most immediate concern to tax practitioners.
SMALL-BUSINESS TAX CREDIT
Perhaps the most confusing of the new provisions that tax practitioners will have to deal with quickly is the small-business health care tax credit. This credit is designed to help small businesses provide health insurance coverage for their employees. Eligible small employers are entitled to a 35 percent tax credit for premiums paid toward health insurance coverage (25 percent for tax-exempt eligible small employers).
An eligible small employer is an employer that has no more than 25 full-time employees and the average annual compensation of its employees is not greater than $50,000. The credit starts to phase out at 10 full-time employees and average annual compensation of $25,000, and is totally phased out once the 25 full-time employees and $50,000 average annual compensation level is reached.
Certain owner/employees are excluded from the definition of employee for this purpose, including self-employed individuals, 2 percent shareholders of an S corporation, a 5 percent owner of a small business, and certain related individuals. Special rules are provided for determining full-time equivalent employees and the treatment of seasonal employees.
The IRS has provided some guidance on the small-business health care tax credit, including a list of frequently asked questions, some sample scenarios, and a step-by-step guide for calculating the credit. The credit is effective for tax years beginning after Dec. 31, 2009.
ADULT CHILDREN
Effective March 30, 2010, adult children of employees through age 26 are to be treated as if they are dependents of the employees and allowed dependent coverage under employers' group health insurance plans. Over 20 states had already adopted some variation on a similar requirement, so many health insurers and employers have already had to start dealing with this type of requirement.
Studies have indicated that children in this age group are among those with the highest percentage of uninsured individuals. This provision, like the small-business health care tax credit, is designed to help increase the number of persons covered by health insurance.
INCREASE IN ADOPTION LIMITS
Although less clearly related to health care reform, the health care legislation includes a $1,000 increase in the limits available under the adoption credit. This increases the limit for the credit to $13,170. The change is effective for tax years beginning after Dec. 31, 2009. The legislation also postpones the sunset of these increased amounts of the credit to tax years beginning after Dec. 31, 2011. The increased limits also apply to employer-sponsored adoption assistance programs. Perhaps by promoting adoptions, the hope is that more children will be placed into families where health insurance is available for the children.
STUDENT LOAN FORGIVENESS
Repayments under state loan repayment or forgiveness programs that are intended to provide for the increased availability of health care services in underserved or health-professional-shortage areas are excluded from gross income. This change is in addition to the existing exclusion for repayments under the National Health Service Corps Loan Program and state repayment programs under the Public Health Service Act.
This change applies to amounts received by an individual in tax years beginning after Dec. 31, 2008.
NATIVE AMERICAN HEALTH CARE
Qualified health care benefits provided to a member of an Indian tribe by an Indian tribal government or tribal organization, and the member's spouse and dependents, are excluded from gross income. This change is effective for benefits and coverage provided after March 23, 2010.
THERAPEUTIC DISCOVERY PROJECTS
Perhaps one of the more puzzling effective dates in the new health care legislation is that for a new 50 percent tax credit for qualified investments in qualifying therapeutic discovery projects. Although enacted into law on March 23, 2010, and including a requirement that projects be pre-approved by the IRS, the provision is effective for amounts paid or incurred after Dec. 31, 2008, in tax years beginning after such date, and expires after 2010.
Since health care legislation was under consideration throughout most of 2009, it is possible that some companies had already undertaken projects for which they were hoping the credit would be available and they lobbied to retain the 2009 effective date with the hope of retroactive approval of the projects. A taxpayer eligible for the credit must employ no more that 250 employees at the time the application for the credit is submitted. This employee limit may also be an indication of which company or companies were lobbying for the credit.
The credit may also take the form of a grant, rather than a tax credit. There is some confusion in the new law as to the deadline for grant applications to be received, with one provision stating that they are to be received before Jan. 1, 2013, while another states that they are to be submitted no later than the due date for the return for the 2010 tax year.
LIMITING EXECUTIVES
There are a few revenue-raisers that also have 2010 effective dates. One of these limits the deduction for employee remuneration paid by certain health insurance providers. This provision applies to tax years beginning after Dec. 31, 2009. It provides that applicable individual remuneration for services performed is not deductible above $500,000. An applicable individual is an officer, director or employee of a covered health insurance provider. A covered health insurance provider is an employer which is a health insurance issuer and which receives premiums for providing health insurance coverage. Some different rules apply starting in 2013.
ECONOMIC SUBSTANCE DOCTRINE
A transaction will be treated as having economic substance if, apart from the federal income tax effects, it changes in a meaningful way the taxpayer's economic position, and the taxpayer has a substantial purpose for entering into the transaction. This codifies and makes uniform a judicially developed doctrine for analyzing the tax treatment afforded business transactions. Codification is not intended to alter the flexibility available to the courts in other respects, including the courts' ability to aggregate, disaggregate or otherwise recharacterize a transaction when applying the economic substance doctrine.
This change is effective for transactions entered into after March 30, 2010. The accuracy-related penalty has been expanded to include understatements attributable to application of the economic substance doctrine.
BLACK LIQUOR EXCLUDED
"Black liquor," a by-product of paper production, has been excluded from eligibility for the cellulosic biofuel producer credit. This change applies to fuels sold or used on or after Jan. 1, 2010.
GROUP HEALTH PLANS
Group health plans are subject to new requirements, including extension of dependent coverage, mandatory coverage of preventive health services, prohibition of lifetime or annual limits on the dollar value of benefits, unreasonable annual limits, and rescission. The change is basically effective as of March 23, 2010, although some of the specific requirements have delayed effective dates, with several changes effective for plan years beginning six months after March 23, 2010.
CHARITABLE HOSPITALS
Four new requirements have been imposed on Code Sec. 501(c)(3) hospitals to retain their exempt status. These relate to a community health needs assessment, a financial assistance policy, a limitation on charges, and billing and collection requirements. An excise tax is also created as an alternative to revoking tax-exempt status if the requirements are not met. Most of the new requirements apply to tax years beginning after March 23, 2010.
CODE SEC. 833 ORGANIZATIONS
The special deduction from regular tax that Blue Cross and Blue Shield organizations, and other qualifying health insurance organizations, are allowed under Code Sec. 833 is modified to provide that these organizations will only be entitled to this special tax treatment if 85 percent or more of their insurance premium revenues are spent on clinical services. This change applies to tax years beginning after Dec. 31, 2009.
TANNING SERVICES
Another revenue-raiser with a 2010 effective date is the new 10 percent excise tax imposed on indoor tanning services. The tax is imposed on the patron, but the salon owner is required to collect and remit the tax. The provision applies to services performed on or after July 1, 2010. A technical definition is provided as to what constitutes an "indoor tanning service."
SUMMARY
By and large, tax practitioners will have some time to absorb many of the tax provisions of the new health care legislation. However, several of the provisions have an immediate effective date and should be brought to the attention of affected clients as soon as possible. Fortunately, many of the provisions with the earlier effective dates are likely to provide positive tax consequences for those clients, although, as usual, there are a number of exceptions to that rule.
George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at CCH Tax and Accounting, a Wolters Kluwer business.
