1. Is a taxpayer entitled to the credit for an employee who works outside North Carolina if that employee otherwise qualifies the employer for the credit?
   

   Yes.



2. If the taxpayer is on a fiscal year basis and the credit flows through to the individual partner or individual shareholder who is on a calendar year basis, what 12 month period is considered for the 25 or fewer employees test, the taxpayer’s fiscal year or the individual’s calendar year?
   

   The taxpayer’s fiscal year because the taxpayer creates the eligibility for the credit.



3. What is the effective date of the credit?
   

   The credit is effective for tax years beginning on or after January 1, 2007. This includes the calendar year 2007 and fiscal years that began on or after January 1, 2007.



4. How does a fiscal year taxpayer perform the $40,000 wage test? Does it, for example, consider: (a) the W-2 wages for the calendar year that ends within the fiscal year (i.e., a 9/30/08 entity would consider 12/31/07 W-2 taxable wages); (b) the W-2 wages that would have been reported for that fiscal year; or (c) some other formula?
   

   The $40,000 wage test is determined based on the taxable year of the taxpayer claiming the credit rather than the calendar year for which the W-2s are issued.



5. For a fiscal year ending in 2007 (such as 9/30/07), does the taxpayer consider wages in that entire year or only wages since the credit became effective on 1/1/07?
   

   The taxpayer whose fiscal year was 10/1/06 through 9/30/07 is not eligible for the credit because the fiscal year did not begin on or after January 1, 2007.



6. What type of business entities are eligible?
   

   Partnerships, S corporations, LLCs, sole proprietorships, etc.



7. For the $40,000 wage test, does the taxpayer test against federal taxable wages, social security wages, or medicare wages, etc.? Which line on the W-2 is considered in determining the maximum $40,000 wages?
   

   Social security wages (line three of the W-2) are used for the wage test because the amount reported as wages, tips and other compensation (line one of the W-2) may be less than the employee’s total wages and salary in cases where an individual has wages that are reduced by pretaxed items, such as a deduction to a deferred comp plan. A fiscal year taxpayer cannot rely on the amounts shown on the W-2s issued. It must use the amounts paid within the fiscal year.



8. If an employee is hired with a contract of $60,000 per year ($5,000 per month), but that employee leaves after working only 6 months and his W-2 social security wages show $30,000, is the taxpayer entitled to a credit for this employee if he otherwise qualifies? Does the taxpayer consider the employee’s annual wages as $60,000 or $30,000 in determining the annual wages test of $40,000 or less?
   

   The $40,000 test is measured by the amount of wages expected to be paid to the employee on an annual basis. In this example, the employee would not meet the wage test because his expected annual wages were $60,000.



9. If a taxpayer has one job position that pays $40,000 or less on an annual basis, but has two employees during the year that are placed in that position, does the taxpayer have one or two credits?
   

   The taxpayer would be able to take two credits because the taxpayer must have provided health insurance for both employees. Remember that the employer must provide health insurance for all of its eligible employees to take any credits.



10. Does a business owner receive a credit for its own health insurance?
    

    Yes, if the taxpayer is an eligible employee as defined in G.S. 58-50-110 and meets the other criteria for this credit.



11. What if the taxpayer is more than a 2% S corporation shareholder that included health insurance in their taxable wages under the Internal Revenue Code?
    

    If the taxpayer is an eligible employee as defined in G.S. 58-50-110 and meets the other criteria, the taxpayer is eligible for the credit.



12. Is the taxpayer required to add back the credit as an addition to income to prevent a double benefit? If so, what types of taxpayers would be affected?
    

    There is no addback required for individual income tax purposes; however, an addition is required pursuant to G.S. 105-130.5 (a)(10) for C corporations.



13. How does this credit apply to a multi-state employer?
    

    If the taxpayer is an individual who is a nonresident or part-year resident, the taxpayer must reduce the credit by multiplying it by the proration percentage on the individual income tax return. If the taxpayer is not an individual and is required to apportion its multistate business income to North Carolina, the taxpayer must reduce the credit by multiplying it by the apportionment factor used to apportion its business income to North Carolina.



14. How is the 25 or fewer employees test measured?
    

    The Department considers the total number of employees at any one time during the tax year rather than the total number of employees throughout the tax year when determining whether the taxpayer meets this test. If, for example, the taxpayer has 25 employees, two of which quit and then two new employees are hired, the taxpayer meets this test. Although the total number of employees over the entire year exceeds 25, at no time during the tax year did the taxpayer have in excess of 25 employees.



15. Is the taxpayer required to have 25 or fewer employees in all states or just in North Carolina?
    

    All employees, regardless of their employment location, are considered in determining the maximum number of employees test.



16. Is the taxpayer eligible for the credit for health insurance premiums paid on behalf of part-time employees?
    

    Under G.S. 58-10-110(10), ‘“Eligible employee” means an employee who works for a small employer on a full-time basis with a normal work week of 30 hours or more… does not include employees who work on a part-time, temporary, or substitute basis.’ The employer may not claim the credit for a part-time employee.

Last modified on: 10/31/07 03:26:57 PM.