The 4 Biggest Small Business Tax Problems Caused by the ACA

man holding umbrella from falling taxes In recent years, few regulations have impacted small businesses as much as the Affordable Care Act (ACA). While the law itself does not primarily touch on taxes, its requirements are causing financial problems for many small to medium-sized businesses across the country.

As you learned in our last blog, businesses that classify as Applicable Large Employers (ALEs) are now required to provide employees with health insurance. The financial burden of employee coverage for ALEs means that small businesses qualifying – or close to qualifying – should carefully consider additional expenses during their year-round tax planning and preparation.

To help you plan and avoid running into tax problems, we’ve compiled a list of the four biggest challenges for small businesses resulting from the ACA.

1) Annual Penalties

First and foremost, getting hit with a government penalty jettisons your small business’s cash and makes effective tax planning much more difficult (if not impossible). If your business has more than 50 Full-Time Equivalent employees (FTEs) and you fail to offer insurance, you could be penalized. Refer to our last blog for information on how to calculate your number of FTEs.

After your first 30 employees, you could start paying a whopping $2,000 per employee in penalty fees. If you offer a plan that costs more than 9.5% of the employee’s income and he or she chooses a subsidy instead, the penalty for that employee might be up to $3,000.

If you get hit with multiple penalties and have to pay, you’ll be awash with cash problems. Make sure you understand your federal obligations now in order to avoid issues down the road.

2) Daily Penalties

Before the ACA’s passing, small businesses could provide employees with a budget that let them choose their own insurance plan. However, the upcoming Market Reform enactment states that small businesses (that do not meet ALE status) opting to provide employees with an insurance stipend are now possibly subject to a fine of $100 per employee, per day.

This means that after July 1, 2015 (when the Market Reform enactment is in effect), offering improper reimbursement to your small business employees could incur an annual penalty of $36,500 per employee.

This doesn’t just cause cash flow problems for small business owners: It’s enough to put many out of business. If you already have problems with cash flow come tax time, chances are you can’t afford to offer employees reimbursement at all.

3) Plan Limitations

The number of plans your small business is able to offer employees through the government exchange is somewhat limited. If you don’t offer government-mandated coverage at government-mandated prices, you could get slapped with additional penalties, worsening tax problems.

The list of elements that the government considers mandatory and acceptable is exhaustive. Meeting certain criteria may also cause problems in other areas. For example, plans considered acceptable may be cost-prohibitive for your business. Conversely, a cost-effective plan that covers a limited range of benefits might not be considered acceptable.

4) Reporting Requirements

In addition to penalties and plan limitations, your reporting responsibilities as a small business owner could also be vastly increased, resulting in lost time and productivity, less profit and leaner coffers at tax time.

The information you may have to report includes (but is not limited to):

  • To employees: a Notice of Summary of Benefits & Coverage that clearly explains benefits and coverage

  • To employees: written notice of the availability of the government-run health exchange

  • To the government: burden of proof that you didn’t exclude offering insurance to qualifying employees

To ensure that you are compliant with the full range of reporting requirements and avoid tax problems, consider working with an expert tax consultant with deep ACA knowledge.

When turning to your tax planning this year, don’t overlook the dramatic impact that ACA regulations could have on your small business. Do not risk your hard-earned cash: Understand the full scope of the law, and partner with an expert consultant to avoid facing taxes and harsh penalties simultaneously.

Do you have the support you need to manage your small business bookkeeping? Contact us to schedule an appointment to speak with a local small business advisor.