Health Care Credit with S Corp

Required Research Problem

Spring 2011

Accounting 580

Instructions: You should prepare a Alegal@ memorandum to your client providing tax advice on the proposal set forth here. Be sure to include citations to code sections, regulations and other authorities that you rely upon in reaching your conclusion. The paper generally runs about two to three pages and is due the last day of class or May 10, 2011..

Facts:

Your client is Android Cellar who operates a successful computer consulting business as an S Corporation. Android is the sole owner of the S Corporation. He employs two workers (Geeko and Byte) who work with him in this business. Android works from home so he employs a Nanny (called Analog) to take care of his two children. He employs all of these workers through the S Corporation.

The S Corporation has been in existence for three years (including 2010) and had gross receipts/net taxable income as follows. Note that taxable income is after deducting all expenses including salaries.

Gross Receipts Taxable Income/(Loss)

2008 $500,000 ($200,000)

2009 $1,000,000 $300,000

2010 $1,700,000 $500,000

During the year 2010 each of them worked the following number of hours for the pay as indicated:

Android (The owner) – Android worked 3,000 hours during the year. He did not take vacation but did take one week off for illness. Android's salary from the S Corporation is $200,000. (Note that self employed taxpayers do not pay themselves salary.)

Geeko (Employee) – Geeko worked 2,000 hours during 2010 and was paid for an additional 80 hours which had accrued for vacation and illness (total of 2,080). Geeko was paid $12 per hour.

Byte (Employee) - Byte worked 1,960 hours but was paid for an additional 2 weeks of vacation (80 hours). Byte also took 1 week of leave without pay (4o hours). Byte was paid $12 per hour.

Analog (Nanny) – Android is divorced with two children over which he has joint custody. On certain days when he had custody of the children, he hired Analog to take care of them as he was not able to get away from the business. Analog worked 1,500 hours during 2010. Analog was paid $10 per hour.

Android offers a major medical plan and a dental plan to his employees who work over 1,000 hours per year. Android has offered this benefit for the entire year 2010. Android pays 50% of the premium cost for the major medical plan for single coverage. This means that the amount paid by Android is limited to 50% of the cost of single coverage even if the employee has a family and elects more expensive family coverage. Android's plan has a premium cost of $6,000 for single and $14,000 for family coverage. Android pays $3,000