Did you know that your summer day care expenses may qualify for an income tax credit? Many parents who work or are looking for work must arrange for care of their children under 13 years of age during the school vacation. Those expenses may help you get a credit on next year's tax return.

Here are five facts the IRS wants you to know about a tax credit available for child care expenses. The Child and Dependent Care Credit is available for expenses incurred during the lazy hazy days of summer and throughout the rest of the year.

1. The cost of day camp may count as an expense towards the child and dependent care credit.
2. Expenses for overnight camps do not qualify.
3. If your childcare provider is a sitter at your home or a daycare facility outside the home, you'll get some tax benefit if you qualify for the credit.
4. The actual credit can be up to 35 percent of your qualifying expenses, depending upon your income.
5. You may use up to $3,000 of the unreimbursed expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit.

For more information check out IRS Publication 503, Child and Dependent Care Expenses. This publication is available here on the IRS Web site or by calling 800-TAX-FORM (800-829-3676).

E.Cohen and Company, CPAs is proud to announce that Gail Fisher has penned an informative and well-received article in the summer 2010 issue of Women Business Owners of Montgomery County's Networker.  WBO provides support and networking for women who own and operate their own businesses, giving them tools to help manage and grow their business.

Gail's article is entitled "Small Business Incentives Under New Tax Laws". Click the "Download" icon below to access a PDF of Gail's article.  Congratulations Gail on a job well done!

 You've likely heard about the new tax credit for small organizations that provide healthcare coverage. Does your business or not-for-profit qualify? Is the credit worthwhile enough that companies that do not offer coverage will now start?

The recently enacted healthcare legislation includes a new tax credit for qualifying small employers. The credit can cover up to 35 percent of employee health insurance costs. It is available for tax years beginning in 2010, and can be claimed for eligible costs incurred before the healthcare legislation became law.

Does your company qualify for the credit? As with most tax topics, there's no simple answer. Here are the qualification rules.

Basics About the Credit

A qualifying small employer is one that:

• Has no more than 25 full-time-equivalent (FTE) workers;
• Pays an average FTE wage of no more than $50,000; and
• Has a qualifying healthcare arrangement in place.

A qualifying healthcare arrangement is one that requires the employer to:

• Pay at least 50 percent of the cost of each enrolled employee's coverage; and
• Pay the same cost percentage for all enrolled employees. However, for tax years beginning in 2010, this uniform cost percentage requirement does not apply. Instead, a favorable transition rule allows you to pay an amount equal to at least 50 percent of the cost of single coverage for all enrolled employees (including those with more-expensive family or self-plus-one coverage). To be eligible for the credit in later years, however, you must pay the same cost percentage for all enrolled employees, including those with more expensive coverage.

In the typical situation in which the employer pays less than 100 percent of the cost of coverage (with employees picking up the balance), the credit can only be claimed for the percentage of the cost that is paid by the employer.

Healthcare premiums paid under a Section 125 cafeteria benefit plan salary-reduction arrangement do not count as an employer-paid cost.  

The credit is allowed for all types of qualifying small employers, including C and S corporations, partnerships, LLCs, and sole proprietorships. However, certain workers who are also owners are classified as excluded workers, and costs to cover them are ineligible for the credit. Specifically, sole proprietors, partners, more-than-2 percent S corporation shareholder-employees, and more-than-5 percent C corporation shareholder-employees are excluded workers. Most employees who are members of these type of owners' families, including in-laws, are also classified as excluded workers, and costs to cover them are also ineligible for the credit.

Key Point. An employee who is married to a more-than-2 percent S corporation shareholder or a more-than-5 percent C corporation shareholder is an excluded worker. However, it is unclear if an employee who is married to a sole proprietor or a partner is an excluded worker. We are awaiting IRS guidance on that issue.  

Calculating FTE Employees and Wages

As you will see, a complicated phase-out rule quickly reduces the credit if your business has over 10 FTE employees or an average full-time wage above $25,000. The credit is completely phased out once the number of FTE employees reaches 25 or the average wage reaches 50,000. Therefore, the FTE employee and wage calculations are really important in many cases. Here is the drill.

The number of FTE employees is calculated by dividing total paid employee hours for the year by 2,080. However, if a worker is paid for more than 2,080 hours, the excess hours are excluded from the calculation. Seasonal employees who work 120 days or less during the year (counting all days that any hours are worked) are also excluded from the calculation. The calculated number of FTE employees is then rounded down to the next whole number.  

The average FTE wage for the year is calculated by dividing total employee wages by the number of FTE employees. Wages paid to seasonal employees who work 120 days or less (counting all days that any hours are worked) are excluded from the calculation. The calculated FTE wage amount is then rounded down to the next multiple of $1,000.  

Because the credit cannot be claimed for costs to cover excluded workers (certain owners and their relatives, as explained earlier), their hours and wages aren't counted in determining the number of FTE employees or the average wage.  

Key Point. As you can see, a business can have more than 25 workers and still be eligible for the credit if some of the workers are part-time employees, seasonal employees, or excluded workers. 

Calculating the Tentative Credit

The maximum possible credit, which we will call the tentative credit, equals 35 percent of the lesser of:

• The employer's real-world cost of providing employee health coverage under its qualifying arrangement; or
• The imaginary cost to obtain "benchmark" coverage in the small-group market as determined on a state-by-state basis by the U.S. Department of Health and Human Services.

In the typical situation in which the employer pays less than 100 percent of the coverage cost, the tentative credit is calculated by multiplying the real-world cost or the imaginary benchmark cost (whichever is less) by the cost percentage paid by the employer.

The benchmark costs for tax years beginning in 2010 were published in IRS Revenue Ruling 2010-13. For higher-cost areas in some states, there may be additional 2010 benchmark costs later on.

 Calculating the Allowable Credit after the Phase-Out Rule

An employer's allowable credit (the amount that can actually be claimed on the employer's federal income tax return) equals the tentative credit (based on 35 percent of the applicable healthcare cost figure) only when the employer has:

• 10 or fewer FTE employees; and
• An average FTE wage of $25,000 or less.

If the employer has more employees and/or a higher average wage, the allowable credit is quickly reduced under a complicated two-tiered phase-out rule that your tax adviser will calculate.

Special Rules for Tax-Exempt Employers

For qualified small employers that are tax-exempt not-for-profit entities, the maximum credit percentage is 25 percent, and the phase-out rule explained above applies to them, too. In addition, the allowable credit amount for the year cannot exceed the sum of:

1. Federal income tax and 1.45 percent Medicare tax withheld from employee wages for that year; plus

 2. The employer's 1.45 percent Medicare tax on wages for that year. Since there is no federal income tax liability to offset, the allowable credit amount for a tax-exempt employer is refunded to the employer in cash.

Other Considerations and Conclusion

• The credit can be claimed for eligible healthcare costs incurred in tax years beginning in 2010 -- before the healthcare legislation was enacted.
• An employer's federal tax deduction for employee health costs is reduced by the amount of the credit.
• The credit is classified as a specified general business credit. As such, it can be used to offset both regular federal income tax and any alternative minimum tax. It cannot be used to offset federal employment tax liabilities. Unused credit amounts can be carried back for one year (but not to any pre-2010 year) and ahead for 20 years. Therefore, unused credits for tax years beginning in 2010 can only be carried forward.

Presumably, a fair number of small businesses that already provide health coverage will qualify for the credit. In this economy, it may not prompt many small businesses to suddenly start providing insurance. The fact that the credit rules are so complicated does not help matters. Consult with your ECC tax adviser about questions in your situation. 

 Business Wisdom for Today's Economy:

Rules Issued for "Grandfathered" Health Plans

Three agencies of the federal government have issued interim rules for health plans that were in existence when the Patient Protection and Affordable Care Act was enacted on March 23, 2010.

Under the healthcare legislation, "grandfathered" health plans are only subject to certain provisions. The interim rules were issued by the Departments of the Treasury, Labor and Health and Human Services. Your company's employee benefits professional can provide more information.

Businesses should be aware of changes the Financial Accounting Standards Board ("FASB") has made to certain accounting pronouncements that may have an effect on your financial statements.  For years ended after December 15, 2009, all non public entities preparing financial statements in accordance with U.S. Generally Accepted Accounting Principles (GAAP) must adopt the accounting pronouncement FASB ASC 740-10 Accounting for Uncertainty in Income Taxes (the Pronouncement).

The Pronouncement, originally referred to as FIN-48, was issued in 2006 and has been in effect for public entities since that time.  Its enactment for all non public entities, including nonprofits, was delayed to provide guidance for pass-through entities (S-Corps, Partnerships, LLC's, etc.) and not for profit organizations.   The Pronouncement applies to all GAAP based financial statements, other than personal financial statements, whether audited, reviewed or compiled.

The Pronouncement requires the entity to review and analyze all "tax positions" taken by an entity and assess the potential for recording a liability for positions where it is "uncertain that the tax position will be allowed."   We do not anticipate there will be a need to record any additional tax liability however you will see additional footnote disclosures. 

On the surface, this may not seem like it has much consequence to non public companies.  However, the requirement to analyze tax positions affects many items that go into the preparation of tax returns.  We will be required to perform additional analysis and we may request information that we have not requested in the past, including:

· For all entities, we may have to more closely examine and perform additional analysis for a number of income tax related accounts.

· Additional inquires may be made related to State income taxes and the locations in which the Company is conducting business.

· If we were not the preparer, we will request copies of income tax returns for all open years (typically three years).

· For S-corporations, we will request a copy of the original S-Corp election (IRS Form 2553).

As your accountants, our goal is to assist you in complying with the Pronouncement while minimizing the impact from the standpoint of additional demands on you and your staff, as well as additional accounting fees. 

 ECC is proud to recognize two of our clients named to Washington Smart CEOs Top 100 List of CEOs for 2010.  Stephanie Cohen from Golden & Cohen and Mark McIntosh from Sim-G Technologies, Inc. have been awarded this prestigious honor.  
 
This exclusive group of the region's top executives, selected by an independent selection committee, was chosen on the basis of their leadership qualities, strategic vision and character, in addition to their clear ability to grow their organizations.

Each Smart100 CEO will be profiled in the 100-plus-page annual Smart100 Book, which SmartCEO will publish as its 13th issue in May. The Smart100 companies represent a variety of industries including government contracting, information technology, consulting, travel services, financial services and video production.  The Smart100 are also listed online at www.smartceo.com on pages 50 and 51 of the digital magazine.  

Congratulations Stephanie and Mark!  To learn more about these CEOs and their dynamic companies, please take a peek at their websites at www.golden-cohen.com and www.sim-gtech.com

 

ECC is extremely proud to announce that we have been named #10 in the United States as a 2009 Best Accounting Firm To Work For in the small firm category.  We are the only small firm in the Washington DC area to make this list!

At ECC, we realize our people are our most valuable asset.  We have a great team that contribute to the firm's success, as well as our clients' success.  Great job!

In this very busy Holiday Season, ECC has been given a gift by Kevin Crowley, Jr., who recently spent two hours picking up trash along our Adopt-A-Road highway in North Potomac, MD.  Kevin's effort yielded two 13 gallon bags of trash, one bag of recyclables, and several cardboard boxes.  What a nice surprise during this season of giving.  Many thanks, Kevin!

Congratulations E. Cohen and Company, CPAs!  We made the 2009 Inc. 5000 list of the fastest-growing private companies in America.

This achievement puts ECC in the elite group which has, over the years, included companies such as Microsoft, Timberland, Intuit, Jamba Juice, Oracle, and UnderArmour.

In fact, many of today's most successful U.S. companies received their first national recognition when they appeared on the Inc. list.

E. Cohen and Company, CPAs is pleased to announce that Eric Cohen was featured in Rockville Economic Development, Inc.’s “Why Rockville” advertising campaign.  This series is sponsored by The Gazette of Politics and Business and Capital Bank, and features Rockville company CEO’s answering the question, “Why did you choose to locate your company in Rockville, and why do you stay here?”

Click here to view the ad and find out "Why Rockville" for E. Cohen and Company, CPAs.