Health tax credit limiting for some

Small businesses that employ family are facing curbs

By Kay Lazar
Globe Staff / May 30, 2010

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It has been promoted by the Obama administration as one of the most tangible and immediate benefits of the new health care law — a tax credit for small businesses to help them offer health insurance to their workers.

But many Massachusetts small business owners who employ mostly family members are discovering fine print in the new law that disqualifies, or substantially limits, their tax credit.

That language says family-owned businesses are not allowed to count employees who are also family members toward the credit, which is retroactive to January.

Marcia Capobianco, a bookkeeper at her family’s Accurate Automotive shop in Hyde Park, was stunned when the family’s business consultant recently gave her the bad news.

“We are just trying to make a living,’’ she said. “I have been going frantic trying to figure out what I am going to do about health insurance.’’

Like many other small business owners, the Capobiancos have weathered double-digit increases in insurance rates, so they were eagerly anticipating a tax credit that would help defray some of their costs.

But the company only has one worker who is not a family member, which means the $3,800 annual credit they were counting on for the four-person shop — including Capobianco’s two sons — shrinks to less than $1,000.

“I guess,’’ Capobianco said, “we’re just peons.’’

Apparently, they have plenty of company.

“Lots of businesses with five or six workers would have family members,’’ said Bill Vernon, Massachusetts director of the National Federation of Independent Business, a trade group for small businesses.

“Far be it from me to say any benefit to any company struggling with the cost of health insurance is not a good thing,’’ Vernon said, “but it’s not going to get at the vast majority of businesses that are struggling.’’

A Treasury Department spokeswoman said family members are typically excluded from business tax credit programs to ensure “fairness with respect to nonrelated taxpayers . . . to protect the integrity of the system and prevent abuse.’’

Still, the Council of Economic Advisors, an agency that provides economic advice to the president, estimates that 4 million small businesses nationwide would be eligible for the tax credit, if they provide health care to their workers.

The complicated new law allows a small business to claim a federal tax credit worth up to 35 percent of what the company spends on health insurance for its workers. To qualify, businesses must have fewer than the equivalent of 25 full-time employees, have average annual wages of $50,000 or less, and cover at least 50 percent of the cost of health care for their workers.

The credit is calculated on a sliding scale, with the full 35 percent credit going to businesses with the equivalent of 10 or fewer full-time employees and average annual salaries of $25,000 or less.

But the section that knocks the Capobiancos, and many other family-owned businesses, out of the running isn’t found on the White House “Fact Sheet’’ that was released April 1, shortly after Obama signed the sweeping health care overhaul bill into law. Information on the exemption can be hard to find. It appears in a recent IRS “Frequently Asked Questions’’ bulletin as answer 14 in the 22-item release and states that a family member of a business owner or the owner’s partner is not considered an employee for “the purposes of this credit.’’

“For this purpose,’’ the bulletin said, “a family member is defined as a child (or descendant of a child); a sibling or step-sibling; a parent (or ancestor of a parent); a step-parent; a niece or nephew; an aunt or uncle; or a son-in-law, daughter- in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law.’’

Leaders of small business groups, including Jon Hurst, president of the Retailers Association of Massachusetts, said they had been unaware of the family exemption with the health insurance tax credit program.

What is causing a lot of the confusion, said Bill Fields, a business consultant in Sandwich who has advised dozens of companies, is that many bulletins sent to businesses from federal agencies about other tax credits specifically stated that family members would be excluded. But not this one.

“The examples used by the administration showing how the formula works do not include a mention that family members are excluded,’’ Fields said.

Many of his clients who have family-owned businesses have not been able to reap much savings with the new tax credit but some who employ few or no relatives have done quite well. Precisely how many family-owned companies might be largely shut out of the credit is hard to pinpoint. Neither the state’s Executive Office of Labor and Workforce Development nor the US Bureau of Labor Statistics tracks the number of family-owned businesses that employ mostly family members.

“Any old-fashioned family business that isn’t totally family will make out like a bandit,’’ Fields said. “This tax credit may allow some to offer a little more health insurance or a better health plan with lower co-pays for employees.’’

That is what David Wert intends to do.

Wert owns Home Instead Senior Care, a Boston company that provides home health aides for seniors. Just one of his 40 employees is a family member, and that worker is part time. Fields, who is Wert’s consultant, believes the senior care company will be eligible for $4,812 in tax credits this year.

“Health insurance premiums are going up, taxes are going up, but never before have I gotten a break,’’ Wert said. “It will certainly help us this year get a few more people on health insurance at an affordable rate, and help keep our fees down to our clients.’’

Kay Lazar can be reached at

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