Why Churches are Leaving Money on the Table - The Health Care Tax Credit

Could a local church put an extra $5,000 - $40,000 to good use? In my experience, the answer to this question is always “yes.” You will then be surprised to learn that the majority of churches have no knowledge of their opportunity to receive significant tax refunds and are effectively leaving money on the table.

By law, churches are exempt from an annual IRS Form 990 filing which other nonprofits are required to complete. As a result, a church generally may not need to interact with an accountant. However, if every church did have a good accountant, he would certainly convince the leadership to file for the Small Business Health Care Tax Credit.

The Health Care Tax Credit was signed in law as a part of the Affordable Care Act of 2010 and offers relief to small employers providing health insurance to their workers. The purpose of the credit was to encourage small employers to continue offering coverage to employees instead of sending them out to insurance exchange marketplace. Under the law, qualifying churches are able to receive a refund up to 25% of health insurance premiums paid. Churches which I have assisted have received as much as $16,500 refund for a single filing and the total refunds for all churches I have assisted has exceeded $300,000.

The secret to the significant benefit of the Health Care Tax Credit to churches rests in the tax status of ministers. When most small employers attempt to take the tax credit, they find their refund becomes severely limited by their average annual wages. This refund limitation kicks in once average annual wages exceed $25,000, and the refund is completely phased out once average annual wages reach $50,000. While the tax credit rules do reduce refunds for many small employers, the tax status of a church minister generally creates larger than usual refund. Because a minister’s wages are not subject to FICA tax, the minister’s wages are excluded when calculating average annual wages. With lower average annual wages, a church’s refund tends to be maximized to the full 25% tax credit.

Churches have also benefited under the Health Care Tax Credit by the ability to file only to receive a refund under a specific IRS provision on Form 990-T. This allows the church to skip all of the standard 990 filing disclosures and financial information. Instead, the filing process is simplified to include only the information required to claim the Health Care Tax Credit.

By speaking with a number of churches, I have found that the most widespread misconception about the tax credit is that “we must have missed our chance for the refund by now.” Instead, churches should be aware that the IRS statute of limitations to file for a refund is three years from the original tax return due date. This means churches can currently file and receive refunds for 2011, 2012, and 2013 tax years. I would recommend that a church take advantage of filing for multiple years now before the tax credit rules are scheduled to become more stringent for 2014 and beyond.

Authored by Dan Chodan, CPA, a member of the Tax-Exempt Organizations practice group at Trout, Ebersole & Groff LLP. Dan specializes in the Small Business Health Care Tax Credit and other tax issues related to the Affordable Care Act.