Among the many policy changes in the recently enacted health care legislation (click here, for a story in the April 5 NBN), builders and the residential construction industry should be aware of two tax policy changes in particular:

• New Tax on Capital Income
  
  Set to take effect in 2013, a tax increase on capital income — such as capital gain and rents — will affect some real estate investments. However, it should have a negligible impact on sellers of principal residences.
  
  The new 3.8% Medicare tax on so-called unearned income will affect high-income taxpayers who report taxable income due to capital gains and other non-wage income. It will not affect income that is currently tax-exempt, including most capital gain due to the sale of a principal residence (due to the $250,000/$500,000 gain exclusion rules). Taxpayers with less than $250,000 in income will not see any increase in tax.
  
  Under prior law, Social Security and Medicare benefits are financed by payroll taxes on wages. The tax is equal to 12.4% of covered wages up to a maximum amount ($106,800 in 2010), with half paid by the employer and half paid by the employee; and 2.9% of covered wages uncapped, again with half paid by the employer and half paid by the employee. Self-employed individuals — including independent contractors — generally pay both the employee and employer parts of the tax. Unearned income (e.g. rents, dividends, interest and capital gains) were not subject to these taxes.
  
  As a result of the Patient Protection and Affordable Care Act of 2010, this system is changing. Under revised law, the Medicare tax will increase for taxpayers earning more than $250,000 (if married) or $200,000 (if single). In particular, the individual’s Medicare portion of the tax — which was previously 1.45% or half of the 2.9% — increases to 3.8%, but only for certain income amounts. The rate of 3.8% applies to the smaller of: (1) the amount of income above $250,000/$200,000 of modified adjusted gross income; or (2) net investment income. The tax also applies to self-employed individuals.
  
  Net investment income is the sum of income from interest, dividends, annuities, royalties, rents and capital gain — except income derived from active participation in a trade or business, including sole proprietorships, partnerships and S Corporations.
  
  As noted earlier, tax-exempt unearned income (excluded gain from the sale of a principal residence or interest income allocable to a tax-exempt bond) is not subject to this new tax. 
  
  Here are two examples:
  
  
  • Suppose a couple has wage income of $260,000 and $9,000 in capital gains. The extra 3.8% tax applies to the smaller of $19,000 (the difference between $269,000 and $250,000) and $9,000.  $9,000 is smaller, so the increased tax is equal to $342 ($9,000 times 3.8%).
    
    
  • Suppose a couple has wage income of $50,000 and gains income of $210,000. The extra 3.8% tax applies to the smaller of $10,000 (the difference between $260,000 and $250,000) and $210,000. $10,000 is smaller, so the increased tax is equal to $380 ($10,000 times 3.8%).
    
    
• Small Employer Health Insurance Tax Credit
  
  For 2010, the legislation establishes a tax credit for certain small businesses that provide health insurance. In general, the credit is available for businesses that pay at least half the cost of health insurance for their employees.
  
  Partial tax credits are available for small businesses with no more than 25 full-time employees and whose employees have average wages no higher than $50,000. Full tax credits are available for businesses with no more than 10 full-time employees with average wages not exceeding $25,000. The maximum credit amount is equal to 35% of the employer’s qualified health insurance expenses.
  
  The credit will be available for tax years 2010 through 2013. After 2013, the credit will only be available for a maximum of two years and only for employers that purchase health insurance for their workers via a state exchange, as provided in the new legislation.

Click here for a list from the IRS of frequently asked question and answers

For further information, e-mail Rob Dietz at NAHB, or call him at 800-368-5242 x8285.

Three New Biztools Business Guides Available Free to Members

Three new Biztools builder business guides ― created to help NAHB members manage their businesses more effectively and increase their profits — are now available free to members through the NAHB Web site.

The guides offer members tips on technology, business planning, how to ensure the financial health of their businesses and more.

Produced by NAHB's Business Management and Information Technology Committee and found in the business management resources section of the NAHB Web site, the new 2010 Biztools builder business guides include:

• “Business Management for Home Builders: Poising for Recovery as the Market Turns”
• “Financial Management for Home Builders: Measuring Key Metrics to Plan Your Path”
• “Information Technology for Home Builders: Using Technology to Better Market Your Business”

All three concise guides ― which include lists of other valuable NAHB Biztools resources ― are written by experts in the field and can be downloaded by members for free at www.nahb.org/bbg.

Free Earlier Edition Biztools Business Guides Also Available

The 2006, 2007, 2008 and 2009 Biztools builder business guides are all available free to NAHB members and can be downloaded from the NAHB Web site in a PDF format only.

To view or download these guides, click here.

Improve Business Operations With ‘Cost of Doing Business Study’

The “Cost of Doing Business Study, 2010 Edition,” available through BuilderBooks.com, enables home builders to compare their business operations with like-sized builders across the country so they can fine-tune their businesses and boost profits.

The study analyzes several operational business categories ― including volume, operation type and land vs. no land costs ― and enables builders to identify their strengths and weaknesses, increase efficiency, set realistic budget targets and improve business practices.

The categories have been analyzed, where applicable, by average and by the top and bottom 25% of performers by net profitability.

Builders can use the study to develop proven strategies to succeed in an increasingly competitive market.

To view or order the “Cost of Doing Business Study” online, click here, or call 800-223-2665.