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As small-business owners sharpen their pencils this tax season, they may be overlooking a little break tucked away in IRS Form 8941.
A relatively new tax credit is available to certain small businesses and charities to help offset the cost of providing health insurance to their workers. But tens of thousands of businesses in Minnesota and across the nation are leaving money on the table, according to the U.S. Treasury Department.
As part of the federal health reform law, businesses and nonprofits that pay at least half the cost of health insurance can claim the credit if they employ fewer than the equivalent of 25 full-time workers and pay less than $50,000 on average.
Employers can get a break on up to 35 percent of their premium costs, based on a sliding scale. The smaller the organization, the bigger the tax credit.
Despite mass mailings from the Internal Revenue Service, the number of businesses claiming the credit last year, the first year it was offered, was much lower than the government anticipated.
By May of last year, only 309,000 of the nation's small businesses and charities had taken advantage of the provision, receiving about $435 million in credits, according to the most recent data from the Treasury Department. An estimated 1 million small businesses currently offering insurance didn't take it.
"There's obviously a big gap," John Arensmeyer, CEO of Small Business Majority, a California-based policy advocate for small businesses and backer of health care reform. "Clearly more needs to be done in terms of communication."
Minneapolis businessman Dan Nordley has taken the credit for the past two years, though he said the $700 hardly makes a dent in the spread of rising premiums for what his broker calls a "Cadillac plan."
Nordley has small group coverage through HealthPartners and pays 100 percent of premiums for his workers at the graphic design firm TriangleParkCreative, where average salary for the 10 workers is about $48,000.
"I was kind of excited about [the credit] last year as a way of reducing some of the costs," he said. "But for companies whose compensation is above living wage, it doesn't do a whole lot."
TriangleParkCreative does branding, print and Web design work for nonprofits involved in social justice, economic and environmental sustainability issues. It's part of Nordley's personal ethos to provide health benefits even though he believes the current model that puts the onus on businesses is misguided.
"I'm in the business of graphic design. I'm not in the business of providing health insurance to my colleagues or having them make tough decisions that are going to impact their health and their family's health," he said.
Minnesota's IRS office couldn't provide a breakout of how many businesses and charities in the state are claiming the credit.
Nearly 80,000 small businesses in Minnesota could potentially qualify for a partial tax break if they offer insurance, according to a survey done for the Small Business Majority and Families USA by the Lewin Group. About three in 10, or nearly 23,000 small businesses, could be eligible for the full credit.
The complexity of figuring out the credit for those on the edge, and the size of the break, may be part of the reason business owners are slow to taking the credit. And the credit doesn't seem to be sweet enough to convince a company that isn't offering health benefits to start, particularly as the economic recovery remains fragile.
"No one's really making any decisions based on the tax credit," said Eden Prairie accountant Scott Manion of Boulay, Heautmaker, Zibell & Co., who has created a spread sheet to work through the calculus. "They might say, 'Oh, you got me an extra $500. Thanks.'"
The credit is one of the few provisions of the 2010 Affordable Care Act to kick in before 2014. It was designed to give a hand to some 4.8 million business that employ fewer than 25 workers, but also encourage them to buy insurance for their workers.
In 2014, the individual mandate kicks in. Small businesses won't be required to offer insurance, but workers who don't get it through the workplace will have to buy it themselves, on a state-run exchange or elsewhere.
The IRS has kicked up its outreach efforts this year, working with the tax software industry, insurance brokers and accountants.
President Obama's 2013 budget called for simplifying the rules for claiming the credit, making it more generous and expanding it to include businesses with up to 50 workers. Subject to congressional approval, the expansion would benefit nearly half a million employers who provide insurance to 4 million workers, according to the White House.
Advocates say it may be a small bone from the federal government, but why not take it.
"We're not in any way suggesting this is a panacea," said Arensmeyer of the Small Business Majority. "It's simply one tool to help businesses with the high cost of coverage, particularly businesses with lower-paid employees or smaller firms who might have more trouble paying for insurance than the average business."
Jackie Crosby • 612-673-7335