Small firms finally can begin to deduct health premiums

With all the talk about small business being the engine of growth and new jobs in the U.S. economy, you would think Congress might show some respect.

Perhaps unsurprisingly, the opposite seems true, at least when it comes to health care.

While the biggest of businesses — those designated as “C” corporations — can fully deduct health insurance premiums for their employees, all other businesses — “S” corporations, limited liability corporations, sole proprietors and limited partnerships — get only a partial break.

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The good news is that’s changing.

Small businesses and the self-employed can deduct 60 percent of health insurance premiums for 1999, according to Sally Hatch of H&R Block’s Longmont office. That’s up from 45 percent in 1998. Hatch says it’s one of the biggest changes in the code, and a real boon to small businesses.

“In 2002, it goes to 70 percent, and 100 percent in 2003,” Hatch added.

Being able to fully deduct health insurance premiums is important to small business for two reasons, says Ginny Beauchamp, vice president of the Washington, D.C.-based National Association for the Self-Employed, or NASE.

Health insurance is often too expensive for small businesses to provide for employees, says Beauchamp, partly because it isn’t fully deductible as an expense. Her group estimates 5.3 million Americans employed by small businesses or who are self-employed are without insurance.

“It’s a whole affordability issue for small business,” Beauchamp said. “Being able to deduct that cost, premium cost, is real important.”

While full deductibility is coming in four years, that’s not fast enough for Beauchamp or the NASE.

“One of the association’s top goals for this year is to go on and get it to 100 percent,” Beauchamp said.

She says several Republican senators plan legislation to push up the start time for full deductibility, but it’s uncertain whether it will become law this year.

The second issue driving the change is one of simple fairness.

“It just drives me crazy. It just rubs me wrong,´ said Joe Pariseau, director of the Small Business Development Center at Front Range Community College, which serves parts of Boulder, Adams, and Jefferson counties.

Pariseau adds that another tax — the self-employment, or FICA, levy, should be re-examined by Congress and perhaps cut, as it is particularly onerous to small business.

One might wonder why small businesses are playing at such a disadvantage to big business, at least when it comes to health insurance. It’s not due to other tax breaks small business gets that big business does not. There are no such breaks for small business.

The advantage big business has over small, at least in health insurance, is due to plain old political muscle.

“Corporate America has always been in a position of being able to have tons and tons of lobbyists on Capitol Hill,´ said NASE’s Beauchamp. “Small business, until the last few years, has been really disjointed.”