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This article is incomplete
and available here only for the purpose of soliciting input
into its development. The article may be expanded to include
more information on how to avoid preparer tax penalties and
a discussion of self-assessment of the tax formula for
How to calculate small business excise taxes under IRC
A guide for professional tax preparers
by Tony Novak, CPA, MBA, MT
June 19, 2015
The preparation of 2015 small business tax returns will require the
self-assessment and calculation of a new tax triggered by the Patient
Protection and Affordable Care Act (PPACA). Beginning with the filing of the 2015 federal income tax return
- presumable in early 2016 -
professional tax preparers are required to be able to recognize when
this tax applies and the calculate
the appropriate excise tax for their small business clients under Section 4980D of the
Internal Revenue Code.
This section of tax law was introduced under the PPACA in 2010.
This provision of the law
became effective January 2014 but IRS issued a delay in
enforcement applicable to small business employers that
expired June 30, 2015. After that date, the excise tax must
be self-assessed and included in the tax liability for the
firm's 2015 tax return. Larger employers were already
subject to the excise tax penalty for 2014.
While several authors have published legal commentary on
this section of PPACA, there are no known sources of
practical help for tax practitioners who need to recognize
and calculate the tax liability under this new section of
the tax code.
No official estimates are published on the number of small
businesses affected by this new provision of tax law but I
roughly estimated it to be in the tens of thousands
nationwide based on anecdotal indications of the portion of
small business firms engaging in one of the two trigger
mechanisms discussed below. If we add the number of firms in
violation of other tax provisions for health plans then the
number of affected taxpayers would likely rise much higher.
Recognizing the tax liability
The first step for the tax practitioner is recognizing
when this tax applies. This posed a significant potential
stumbling block because the tax preparer may not recognize a
non-compliant small business health plan.
There are two situations that trigger this tax: 1)
payment of individual health insurance and 2) reimbursing
out-of-pocket medical expenses under an arrangement that is
not integrated with an employer-provided group health insurance
policy. The tax preparer must be able to recognize each of
these situations that triggers a tax.
Neither of these triggers should create a penalty against
one employee business. Small businesses are particularly
vulnerable when they hire their first employee so the tax
preparer should review 4980D issues with a self-employed
client before they make a hiring decision. One person C
corporation owners with high out-of-pocket medical costs, in
particular, may be well-advised to consider using a
contractor like a virtual assistant rather than hiring an
employee. This alternate strategy may make it possible to
continue using individual health insurance and a Health
Reimbursement Arrangement without adverse consequence.
No change to taxation of underlying transactions
There is nothing in this tax code section or any other
part of the PPACA that changes the underlying tax treatment
of health insurance or uninsured health benefits as
my other article here. Instead, the new law adds an
additional layer of tax on top of existing law without
changing the underlying law.
This is important point to consider because some tax
practitioners think that by changing the tax treatment of
the underlying transactions then the 4980D excise tax can be
avoided. For example, some small business accountants report
that they changed a the reimbursement for individual health
insurance from pre-tax to after-tax bonus in an attempt to
avoid triggering the excise tax. The proverbial "two wrongs
do not make a right" applies here. In this example, the
insurance reimbursement is now being reported improperly and
the business is still not in compliance with 4980D.
Method of Calculation
There are two primary methods of assessing the excise
tax: 1) the statutory tax of $100 per employee per day and,
for qualifying employers, 2) a reduced penalty of 10% of the
employer's health care costs.
The larger excise tax penalty - $100 per employee per day - appears
straight forward at first consideration, there are
unresolved issues that may impair accurate calculation.
Assuming that we are preparing the 2015 full year tax return
and the violation existed for the entire year then the tax
is $36,500 per employee. Presumably employees who did not
participate in the employer health plan or reimbursement are
exempted from the penalty but we have no authoritative
Qualifying for the reduced penalty
Considering the potential for greatly reduced taxes, we
presume there will be great interest in qualifying for the
tax for unintentional violations.
The lesser excise tax penalty for unintentional violations
of 10% of health care expense may be substantially lower, we have
no guidance on the availability or applicability of this
reduced penalty. Specifically, a self-assessment of the
reduced penalty raises serious preparer questions. How can
the violation be unintentional if the preparer recognizes it?
And what if the violation continues past the tax filing
deadline where a 4980D excise tax is self-assessed, wouldn't
that be prima facia evidence that the violation is
not unintentional? How can the preparer know about the
violation and simultaneously claim that the violation was
This discussion is incomplete due to a lack of
information at the time of the article's publication.
Minimum penalty on audit
IRC 4980D (3)(a)(ii) has a minimum penalty of $2,500 if a
de minimis violation
is uncovered during audit. This appears to be a way for the
Service to settle cases without arguing that a small
unintentional violation reduces liability to almost nothing.
This provision of the law appears to suggest that small
business employers are potentially liable for even the
Avoiding preparer penalties
It seems clear that this new tax opens the door for
substantial underpayment tax penalties for the small
business employer and their tax preparers. Preparers
should take these additional steps during the preparation of
a 2015 small business tax return to avoid substantial
1) Review the businesses health plan
documents. In some cases the preparer may
discover that required plan documents do not exist. Lack of
required plan documents is a separate tax violation
completely outside of the scope of this article. See
my article here for other common problems with HRA
documents and plan design.
2) Examine the integrated insurance policy.
Is it a group type insurance? Is it issued in the name of
the employer? Does it meet minimum requirements of a
qualified plan under ACA?
3) Review individual health insurance payment
transactions. If the business has any
interaction with individual health insurance payment
transactions, be certain that the IRS would
not classify the transactions as an employer payment
arrangement. Review the employment contract, if applicable,
or documentation of bonuses that might be used to pay for
individual insurance. If an employer is making or facilitating the
payment of individual health insurance then make sure that
the employee has the right to receive cash instead of
4) Consider whether the business meets the
one employee business exemption for individual insurance or
the church plan exemption.
IRS has clarified that a business will not be penalized
simply because individual health insurance was the only
available option. This exemption some but not all of the
requirements of the provisions of 4980D. While issued
regulations address the case of the single employee
business, they do not address the case where there is more
than one employee but only one is eligible for health
insurance. In this latter case, the only insurance option is
still individual health insurance but current regulations do
not clarify an exemption from the excise tax. Church health
plans are also exempt from the excise tax.
Tax preparers who are not familiar with health insurance
and employee benefits documents are well advised to obtain a
professional review and opinion before making a
determination of whether excise taxes under 4980D should be
included on the small business tax return for 2015.
This discussion of tax preparer liability is incomplete
because additional information was not available at the time
of the article's publication. Ideally, some tax preparer
checklist or action framework could be developed to minimize
the possibility of tax preparer liability.
Call Tony Novak, CPA at (800) 609-0683 or
send an e-mail message to
schedule a discussion about how your firm can save money and improve
employee satisfaction by taking full advantage of
the power of today's
consumer-empowered health benefit and retirement savings plans.