IRS is eager to explain new tax credits and deductions for purchase of commercial products and certain medical equipment as well as credits for education, prescription drugs and adult day care. In the press release, IRS refers to the medical device tax as the “Medicare Access and CHIP Reauthorization Act”.
Earned Income Tax Credit (EITC): The IRS explains that, for many taxpayers, the EITC is the most valuable part of the tax system. There are a number of different EITC provisions available, but they all result in a tax credit for the amount you earned (after any deductions, exemptions, and credits) below ,808. The average EITC for 2014 was $2,623.
The standard EITC amount is $6,318 in 2015, which will reduce the federal income tax owed by the maximum amount allowed. But if your adjusted gross income is below the amount mentioned in the example in the IRS video, then the credit for that amount will reduce your tax liability to zero.
The “refundable” EITC amount (you can’t owe tax under the EITC if you receive it) is higher (the IRS says that’s because the actual EITC will be higher than $6,318). But it isn’t available for 2015 and the maximum EITC amount in 2015 for a married taxpayer filing separately is $1,130. For single filers, the EITC amount is $1,300. For married couples filing jointly, the EITC amount is $2,000.
Additional Coverage: The New Medical Devices Tax In The New Year
Refundable Credit for Adult Day Care: the IRS explains that the Child Tax Credit, the Additional Child Tax Credit and the EITC can be used to offset the cost of child care expenses for someone who is no longer working or is in school. The EITC for child care expenses is $1,000, and if you qualify, the maximum EITC amount is $3,000 for a married couple filing jointly.
The credit is partially refundable, so the IRS says it’s useful if you don’t owe tax, but if you do, the EITC can be used to offset a portion of the tax you owe. Those aren’t the only new tax credits for 2015, but they’re some of the most significant for most taxpayers. The IRS has more on the education, prescription drugs and adult day care credits and the Earned Income Tax Credit, so take a look.
Applying the new tax credits to your business
If you purchase commercial products, including services and those provided by your employees, for your business, you will qualify for a tax credit. The amount depends on the manufacturer of the commercial product and the kind of use. The IRS provides the following amounts of credits and amounts of tax credits per type of product:
Who Qualifies for a Medical Device Tax Credit?
- Individuals – $250 for basic medical devices, $500 for medical devices with modifications, and $1,000 for special medical device accessories;
- Corporate to Individual – $250 for basic medical devices, $500 for medical devices with modifications, and $1,000 for special medical device accessories;
- Corporations – $250 for basic medical devices, $500 for medical devices with modifications, and $1,000 for special medical device accessories;
- Businesses – $500 for basic medical devices, $500 for medical devices with modifications, and $1,000 for special medical device accessories.
As stated in IRS press release, credits are subject to annual limits for individuals and for corporations. The IRS income tax table provides information about the amounts of credit available for the type of product or service. The amount of credit, and the limit on tax credits, vary based on age and whether the use is for a current condition or long-term or recurring condition.
The IRS advises the following:
Exemption amounts for individuals, individuals age 65 or older, and married couples filing joint returns with incomes over $100,000 are automatically reduced. It is important to check with your tax advisor to learn if you are eligible for the credit.
How do you get the credit?
Most products qualifying for the tax credit are classified as medical devices. Your financial health plan for your employees, company-sponsored health plans, must comply with the medical device tax. Only your registered representative or other properly authorized representative is authorized to apply for the credit for you.
You will need to make a supply of your complete gross receipts for the year. If you purchase a medical product or service for use by your employees, you will need to include a statement from the doctor or other appropriate health care professional who provides treatment or services, describing your company’s authorized representative.
Benefits of tax credit
According to IRS, the cost of medical device tax credits is expected to average approximately $150 million in 2016. CFOs may wish to consider the tax benefits and savings of medical device tax credits in their business planning. If you are concerned about compliance or are concerned about paying the medical device tax, consult a tax or financial advisor for tax advice.
Benefits of tax credit for business
Businesses often save substantial amounts of money by taking advantage of the tax credit. When calculating your adjusted gross income (AGI), your tax preparer can use the medical device tax credit to decrease the amount you owe. This is especially helpful when your tax rate is higher or on a lower income level, or if you want to further reduce your adjusted gross income (AGI) by taking the tax credit.
If you cannot obtain an advance tax refund for your medical device tax credit, you may be able to use the entire amount on your 2016 federal income tax return (you can use tax credits in a manner similar to paying down debt). In the case of claim of refund of an earned income tax credit or refund of unemployment compensation, the refund must be paid on your 2016 federal income tax return, but the medical device tax credit can be used for any tax year.
Claiming the medical device tax credit can help you reduce your business’s taxable income. When you are not certain of how much you will owe, taking the tax credit can help lower your taxable income and possibly decrease the overall tax rate you pay.
Benefits of tax credit for individuals
Tax credits can reduce an individual’s tax liability. Medical device tax credits allow for a limited amount of tax credits to be claimed each year. It is important to check with your tax advisor to determine the amount of credit you qualify for.
The maximum tax credit for an individual with modified adjusted gross income (MAGI) over $85,000 is $1,500. The credit for an individual with MAGI over $80,000 is $750. There are also additional credit amounts that can be claimed in certain situations.
These tax credits may be obtained as part of the individual’s income tax return, or may be available through a payroll deduction. See the IRS website for more information on tax credits.
Organizations
Although you cannot make a profit from the tax credit, charities can take advantage of the credit. Most charitable organizations, such as charities for the arts, education, religion, and social welfare, qualify for a tax credit. This tax credit makes it possible for them to take money donated and do the most good with that money.
Although the credit is sometimes difficult to obtain, it does apply to businesses. The key to the credit is that it is taken for the taxes you would have paid on the benefit. Employee Retention Tax Credit can also provide some tax benefits for companies who offer incentives to their employees.
Medical Device Manufacturers
This tax credit is particularly beneficial to manufacturers, but manufacturers of medical devices generally provide products that lower healthcare costs for patients. Companies that are involved in the research and development of medical devices can be eligible for a credit. The Research and Development Tax Credit allows these companies to claim a credit on their tax returns for certain research expenses.
There are many more benefits of the medical device tax credit than we have included here, and you can learn more about it at the Medical Device Tax Credit (MDTC) website. If you need help understanding the medical device tax credit or would like to talk to a tax professional about how to make the most of it, please contact One Free Hour Tax Center.
Limitations and Exclusions
There are limitations to the medical device tax credit. For the following items, the credit is not available:
- Certain goods and services that are not for the benefit of the individual
- In order for the credit to be used, the benefit from the medical device
The credit is not available to:
- R&D costs not related to the protection of health and welfare
- Taken in lieu of other business taxes
- Adjustments and losses not directly related to the provision of medical devices
- All benefits must be incidental to, not a result of, the trade or business of supplying, administering, or dispensing medical devices
In order to claim the credit, the individual must file a tax return for the year that they received the credit and must report the credit on the return. A total credit on the return is not necessary for a credit to be received. If the credit is not applied to the individual’s tax form, the refund must be on Schedule 2 and may be determined as a refund of excess tax paid or an additional payment on the individual’s tax return. The government expects that only 30% of individuals will be entitled to the full credit. For individuals with small businesses or self-employed, it may make more sense to allocate the credit among multiple years in order to receive the full credit.
Costs not related to the protection of health and welfare includes R&D expenses, such as salaries and investment costs related to research and development. The costs of general business costs, such as employee salaries and expenses, may not be taken into consideration when determining whether a project has a cost associated with research and development. Credit is only available to the extent of the allowable cost.
Excess cost on a nonqualified trade or business will not be used to calculate the credit. Excess costs are additional costs above the allowable cost. Adjustments and losses not directly related to the provision of medical devices are expenses associated with the manufacturing process. For more information about the medical device tax credit, including a list of allowable costs and the calculation of the maximum credit, visit the IRS website.
When can I claim the credit?
If you can document the costs of medical devices, the Internal Revenue Service (IRS) suggests taking the medical device tax credit in tax year 2022. When making a claim, you need to carefully document all expenses associated with the medical devices used in your company. Each item of expense must be properly documented, such as:
A letter from the surgeon or the individual treating the employee’s injury, written within one year of the event or repair. A receipt documenting purchase of a medical device, including the cost of the device. The name and address of the doctor who signed the documentation. The amount you paid for the device.
Note: Prior to applying the medical device tax credit, make sure your employees, company-sponsored health plans, and your company’s legal department are on board with the tax credit. It is important to prepare for this, especially if your business is dealing with state and/or local tax authorities. Failure to take the credit may have adverse tax consequences, including penalties and interest.
Cash paid on taxes, payroll taxes, withholding taxes, interest, and amounts you pay in excess of the tax amount can be used to offset your medical device tax liability. However, most employers will not use this as an offset. Qualifying expenses include medical expenses, as well as any employer share of Medicare premiums and coverage. In addition, the medical device tax credit applies to expenses that are “maintenance, repair, or replacement” of medical devices, as well as other eligible expenses.
Things to remember
Taking a medical device tax credit is a great way to reduce the total amount of taxes owed. However, it is important to not make the mistake of “using” the credit to make up for income lost. Instead, you should put the credit toward the total tax due for the year. The tax due is often part of the estimated tax due, which your payroll department must compute.
Another option is to pay a portion of the medical device tax credit out of salary and adjust the rest into a separate account. This approach is similar to how tax-deferred accounts are typically treated, such as 401(k) or a pension plan.
Typically, employees pay half of the eligible expenses directly from their paycheck and the other half from salary payments or federal, state, or local withholding. In a 401(k) or similar plan, the employee’s employer generally makes an annual transfer from the plan into the employee’s personal account.
In many cases, you can make a similar payment from an eligible medical device tax credit, since it is an expense related to the use of the device. Proper documentation and tax planning can help you maximize the benefits of the medical device tax credit, and it is recommended that you consult with an experienced tax advisor to help you claim the full tax credit.