Ilana DeBare: Health care plan means only 1% tax for small business

Q: My husband and I own a small S corporation in California with net revenue of less than $50,000 per year. We struggle each year to buy minimal but outrageously costly health insurance for the two of us. If my reading of Gov. Arnold Schwarzenegger's new health insurance proposal is correct, we will be taxed an additional 6.5 percent of our payroll to pay for uninsured citizens. I think maybe small businesses are going to be the losers in this new plan. Am I reading it correctly?

Scared in Santa Cruz

A: The health care reform plan being backed by Schwarzenegger and Assembly Democrats isn't set in stone yet. It still needs approval by the state Senate, and the funding mechanism would need to be approved by state voters on the November 2008 ballot. After that, it's likely to face a legal challenge.

But if passed and upheld by the courts, here's how the plan would affect small businesses and self-employed Californians:

-- Every Californian will be required to have insurance. If you are self-employed and currently uninsured, you will be required to buy insurance either on the open market or through a state pool that will be created.

-- Insurers will not be allowed to deny coverage to individuals based on prior health issues. They also won't be allowed to charge astronomically high rates for pre-existing health conditions - a problem that currently plagues many of California's 2.1 million sole proprietors.

-- Employers will either have to provide insurance for their workers or pay into a state fund, from which uninsured workers will be able to get coverage.

-- The amount that employers must pay - either for insurance or into the fund - will depend on the size of their payroll. Scott Hauge, director of the advocacy group Small Business California, says the ballot proposal is likely to include the following tiered structure for payment:

Employers with payrolls of less than $250,000 would pay 1 percent of their payroll. Those with payrolls of $250,000 to $1 million would pay 4 percent; $1 million to $15 million would pay 6 percent; and over $15 million would pay 6.5 percent.

It sounds like your business has a payroll of less than $250,000. So the good news is that you wouldn't be required to pay 6.5 percent - just 1 percent. And if you're already spending this much on insurance for your employees, you wouldn't have to pay any additional fees.

So is this plan good or bad for small businesses? Like all health care reform proposals, it depends on whom you ask.

The obvious disadvantage is that small employers who don't currently provide insurance will now face a new expense - either buying insurance or paying into the state fund.

"We believe a payroll tax of this level will force small businesses to pay billions in new taxes, cause hundreds of thousands of jobs to be lost and undermine our state's fragile economy," said John Kabateck, state director of the National Federation of Independent Business.

The advantages are that self-employed folks will be guaranteed access to coverage, hopefully at lower rates than they are seeing now. And small employers will have the option of handing over management of their employees' insurance to the state fund.

"It takes you out of the business of administering health insurance," said Marian Mulkey, a senior program officer at the California HealthCare Foundation, an independent nonprofit in Oakland. "Your employees will get coverage but you don't have to deal with choosing plans every year."

Finally, employers may also find more predictability in their insurance costs, since their obligation will never be more than 6.5 percent of payroll. (And depending on their size, it may be less than that.)

"Small businesses have seen double-digit premium increases every year," said Hauge of Small Business California. "We get hit harder than the larger companies. So while we'd have liked to see more cost containment in this proposal, any way to limit those increases makes things more sustainable for small businesses."

There are business groups lining up on both sides of the reform package.

The NFIB opposes the package. And a California Chamber of Commerce spokeswoman said her group hasn't formally taken a position yet but "has concerns."

On the other hand, the reforms are supported by Small Business Majority, a national group started in 2004. And Hauge said his organization, Small Business California, hasn't formally endorsed the reforms yet but is leaning that way.

Want more information? For a general summary of the reform bill, called ABX1, go online to www.calhealthreform.org, a joint project of the California HealthCare Foundation and the Center for Governmental Studies.

Or for perspectives from particular small business advocacy groups, see www.smallbusinesscalifornia.org, www.smallbusinessmajority.org or links.sfgate.com/ZBXB.

Q: Ack! It's the last week of the year and I haven't thought about minimizing the tax exposure of my small business. I'm a sole proprietor with a home office. Is there anything I can do in the last day or two of the year to help my tax situation?

Troubled by taxes

A: If you need more deductions, the last-minute strategy is to buy, buy, buy - before you tell 2007 "bye-bye."

"Expenses you pay in 2007 are deductible in 2007," said Bernard Kamoroff, author of "422 Tax Deductions for Businesses and Self-Employed Individuals," which just released its 2008 edition. "So quick, before midnight on New Year's Eve, pay all those bills sitting on your desk.

"If you need office supplies, buy them before year-end and write them off," Kamoroff said. "Treat your business to that new fax or copy machine or LCD monitor you've been wanting. Pay your 2008 service contracts, Internet fees or similar billings extending into 2008, and write off the entire amount in 2007."

Keep in mind that credit card charges incurred in 2007 are deductible in 2007, even if you pay the bill next year. Checks written and mailed before Jan. 1 are also deductible in 2007, even if they are cashed in 2008.

Questions about which expenses can legitimately be deducted? Check with your accountant.

Farewell but not goodbye: This will be my last Mind Your Business column for The Chronicle. As we ring in 2008, I'll be starting a new beat writing news and features about business and the environment.

It's been a terrific couple of years writing this column. I've learned a tremendous amount about small businesses, from how to introduce American-style smoothies in Uzbekistan to how to craft an effective AdWords marketing campaign. I've met dozens of really knowledgeable sources who have been generous with their time and advice. (Thank you all!)

I've also been gratified to be able to help small-business owners, who are at the heart not just of our economy but of our neighborhoods. You provide tomorrow's big ideas and you make our Bay Area communities a fascinating and unique place to live.

We're committed to maintaining coverage of small business and are looking at various options for this coverage, so stick with us. Meanwhile, I know that many Bay Area small businesses are thinking about how to be "greener." I hope some of the stories on my new beat can help you out with this, and I welcome suggestions for articles you'd like to read about business and the environment. Please stay in touch and e-mail me with your ideas at idebare@sfchronicle.com.