There are numerous instances in which small businesses receive tax-favored treatment compared with their larger counterparts. For the most part, the definition of “small business” for each tax break varies; the definition can turn on the amount of gross receipts, the amount of assets, or the number of employees. Recent IRS pronouncements have created a number of new areas of relief specifically for small businesses.
What this simplified method means to small businesses is an opportunity to easily adopt various elections under the final regulations. However, use of the simplified method is not mandatory; these taxpayers can still choose to file Form 3115. The simplified method does not provide any audit protection while filing Form 3115 creates protection and a paper trail. Use of the simplified method is explained in IRS question and answers related to the final repair regulations.
Waiver of Affordable Care Act Penalty
In light of rising health insurance premiums, some small employers dropped coverage and instead offered compensation to employees so they could purchase coverage on a government exchange. Others provide health reimbursement arrangements to supplement employee out-of-pocket medical costs. The government has taken a dim view of these actions, concluding that the arrangements are impermissible under the Affordable Care Act. As such, an employer can be subject to a $100 per day, per employee penalty (Notice 2013-54 and http://www.irs.gov/Affordable-Care-Act/Employer-Health-Care-Arrangements). However, the IRS has granted relief from this penalty (an excise tax under Code Sec. 4980D) to small employers for reimbursing or paying premiums from Jan. 1, 2014, through June 30, 2015 (Notice 2015-17). A small employer for purposes of this relief is an employer with less than 50 full-time and full-time equivalent employees.
The penalty relief also applies to employers who pay or reimburse employees for Medicare Part B or D, or TRICARE-related expenses. And it applies to health reimbursements arrangements (HRAs) in which employers agree to reimburse out-of-pocket medical costs up to a set dollar limit each year. These plans fail to meet the definition of a health plan providing minimum essential coverage required by ACA. Small employers are not subject to the employer mandate and are not subject to a penalty for failing to offer coverage. They are encouraged to do so by the incentive of the small employer health insurance credit (Code Sec. 45R). Starting in 2014, the credit is up to 50 percent of the premiums paid by the employer. Small employers who nonetheless decide to drop coverage and increase compensation for employees are not penalized as long as they do not require that it be used for medical insurance.
Treatment of Health Care for S Corporation Owners
According to the IRS’ interpretation of ACA, S corporations that pay premiums for more-than-2 percent shareholders would also be subject to the penalty described earlier. Again, the IRS has granted relief in this situation, waiving the penalty (Notice 2015-17).
Because of uncertainty about payments of premiums for these owners, the penalty relief applies until further IRS guidance is provided, but at least through 2015. Until then, S corporations can rely on prior IRS guidance with respect to medical coverage for these shareholders (Notice 2008-1). Under that guidance, S corporations must include medical coverage as taxable compensation to more-than-2-percent shareholders. These shareholders can then deduct 100 percent of the premiums as an adjustment to gross income on their personal tax returns; no itemizing is required.
Work Opportunity Credit Certification
While businesses of any size can use the work opportunity credit (Code Sec. 51), many small businesses do so because every penny counts. When hiring new employees, employers who choose them from certain targeted groups specified in the tax law may enjoy a tax credit (the amount of the credit varies with the group to which the new employee belongs). To qualify for the credit, an employer must submit a pre-screening certification to the state workforce agency within 28 days of the first day of employment. The work opportunity credit had expired at the end of 2014 only to be extended retroactively in mid-December. Many employers failed to timely submit the certifications (IRS Form 8850 and DOL Form 9061 or 9062). Fortunately, the IRS has provided relief for Form 8850 (Notice 2015-13).
According to the Notice, employers have until April 30, 2015 (the IRS website says April 29, 2015), to submit the forms for employees hired in 2014. This will enable them to claim the work opportunity tax credit on 2014 returns. Before claiming the credit, employers must receive certification from the state workforce agency that a new hire is within a targeted group. (Employers may need to obtain an extension of time to file their 2014 returns.) If a particular employee is not certified, the employer can request a reconsideration of the certification.
Going forward, the work opportunity credit expired again at the end of 2014; its fate for 2015 is uncertain. However, employers who hire workers in 2015 and believe they may fall within a targeted group can submit the certification forms to the state workforce agency with the hope that the credit is again extended. The forms will not be processed until the credit is extended.
Simplified Change of Accounting Method
Regulations for tangible property (T.D. 9636) (referred to as the “repair regulations”) and certain dispositions of property (T.D. 9689) that became final for tax years beginning on or after January 1, 2014, may require businesses to change their method of accounting. Usually this means filing Form 3115 (with a return for automatic relief or with the IRS to request relief in non-automatic situations). Fortunately, the IRS has provided relief to small businesses making changes in accounting methods under these regulations (Rev. Proc. 2015-20; IR-2015-29, 2/3/15). They do not have to file Form 3115 or any other formal election for a change in accounting under these final regulations. Instead, they simply implement them on their tax return.
This simplified procedure can be used only by a taxpayer with one or more separate and distinct businesses that has either (1) total assets of less than $10 million on the first day of the taxable year to which the change applies, or (2) average annual gross receipts of $10 million or less for the three prior years (or the years in business if less than three years). The total asset test applies for all of the taxpayer’s businesses; the gross receipts test applies to each separate and distinct business. The term “separate and distinct businesses” is not defined so it is a factual determination.
When a taxpayer makes a change in accounting method, usually this requires an income adjustment (positive or negative) as a result of Code Sec. 481. Under the simplified procedure, a change in accounting method under the repair regulations for 2014 can be made with zero adjustment.
Taxpayers who have not yet filed their 2014 returns can rely on the simplified method. Those who already filed their 2014 with a change of accounting on Form 3115 but want to rely on the simplified method can withdraw Form 3115 by filing an amended return. This must be done no later than the due date of the 2014 return, including extensions.
These various types of IRS relief are favorable to small businesses. However, relying on them may necessitate additional actions by small businesses (e.g., payroll adjustments related to ACA relief).