What kind of impact will The Affordable Care Act have on small businesses in the Kansas City metro?
Sitting like a python in the weeds, the Affordable Care Act (aka Obamacare) is poised to strike small businesses harder than any other market segment. Employer mandates, penalties and several new taxes await implementation in 2014. However, one mandate in particular is all but hidden from view.
As a small business owner, you have probably already heard that the employer mandates only kick in if you have 50 or more full-time employees. Upon hearing that fact, you either thought, “Whew, dodged a bullet there, I employ far fewer than 50.” Or, you thought something like, “Gee, I’ve got 54 employees, I’m screwed.” Note that the “hidden” part is not that there is a 50-employee mandate; rather it is in discovering how the government plans to count your employees.
For employers over the 50 full-time employee mark, many will be looking for ways reduce their workforce numbers to to 49. The most obvious solution is to reduce the workforce. For example, if you have 54 employees, you might think reducing full-time employees by 5 and adding 10 employees who are part-time would retain capacity and solve the problem. Not so. The IRS is counting full-time equivalents, so shifting to part-timers will not help. Ditto for counting seasonal workers. It all comes down to an equation using total hours worked in the year. Only leased or temporary workers will not count, since they are counted as employees of the personnel agency. Be aware that there is a look-back period, and we are already in it for 2014’s taxes.
Another logical tactic for small business owners to stay below the 49-employee limit is to split their company up into two legal entities. Company A could provide production and be subcontracted by Company B that handles sales and back office support. In this way, borderline companies could get some immediate relief.
In fact, I have heard this idea tossed around by commentators on TV news stations, and no one refutes it. But I am here to yell, “Stop!” The astounding truth is this: If there is “common ownership” of the companies, employees are combined and treated as one group, even if the companies are legally separate entities. Let that sink in for a few minutes, and then think about the ramifications of my simple example.
What about a husband and wife who each own an independent business, with both listed as joint owners of each company? I recently interviewed a woman who owns a small manufacturing company, and her husband owns the town Dairy Queen. Neither have anywhere near 50 employees, but combined they do. This is a disaster waiting to happen for them.
Many, if not most, small businesses have more than one owner, and it is not unusual for partners to have ownership in more than one business entity. Sometimes a business mentor will invest in their mentee. Sometimes money to start a business comes from friends or family members. All are subject to the common ownership rule.
How will this affect equity investment in start-ups? If the individual investor has, in addition, ownership in multiple other separate companies, it is conceivable that an entrepreneur could be caught up in common ownership rule while having only two employees. The IRS rules governing controlled groups are applicable here, but the waters are murky. Supposedly, equity investor groups would be exempt, but that is not assured. It depends on how the deal is set up.
Obamacare is 1,000 pages of law and over 13,000 pages of regulations so far. Get all the knowledge you can, and be in close contact with your tax attorney and accountant so there are no nasty surprises down the road.