Forth Tip to Help Avoid a Tax Audit:
The IRS continues to have several audit watch areas for compliance through 2013. Small businesses are going to be a major focus this year. This includes corporations, partnerships and sole proprietors. While you never know when you may be selected for an IRS Tax Audit, these tips will help you understand what the IRS will be focusing on through the 2013 tax season.
Audit Watch Area number 4 “Credit for small business employee health insurance, under Section 45R.”:
This credit, first available on 2010 returns, is now coming under IRS scrutiny. The IRS will examine small business employers and tax-exempt organizations for compliance with Section 45R eligibility requirements.
The credit is for up to 35% (25% for tax-exempt organizations) of the lesser of:
- The amount the employer contributes to a qualified health arrangement for their employees, or
- The small business benchmark premium, which is determined state-by-state.
The amount of the credit is figured on a sliding scale. These percentages are set for 2010 – 2013. In 2014, the percentages are scheduled to increase; more specifics will be available, as we get closer. To qualify for this credit, the small business must be an employer with no more than 25 full-time employees (or full-time equivalents – FTE) with average annual wages of less than $50,000 per FTE employee.
Health insurance paid for family members does not qualify for this credit. Family members of a business owner or the owner’s partner are not viewed as employees for the purposes of this tax credit. These “nonemployees” include children or descendants of a child, siblings and step-siblings, parents or ancestor of a parent, step-parents, nieces and nephews, aunts and uncles, and all the in-laws: son, daughter, father, mother, brother, and sister. Therefore, most small businesses will not qualify for this credit. The IRS will be watching for small businesses that incorrectly claim the credit for family members.
