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Changes Coming for Small Business Health Care Tax Credit

October 16 - Posted at 2:01 PM Tagged: , , , , , , ,

For tax years 2010 – 2013, eligible small employers are entitled to a 35% tax credit for health insurance premiums they pay for employees. Tax-exempt entities are eligible for a 25% credit.


To qualify for the credit, an employer must:


  • Have fewer than 25 full-time equivalent (FTE) employees for the tax year


  • Pay average annual wages of less than $50,000 per FTE


  • Pay no less than 50% of the premium for qualifying employee health insurance


Employers with less than 10 FTEs and average annual wages of $25,000 or less are eligible for the full credit. There is a phase-out of the credit for employers that have between 10 and 25 FTEs or average annual wages between $25,000 and $50,000.


All employers calculate the credit using IRS Form 8941, Credit for Small Employer Health Insurance Premiums. Taxable employers claim the credit on their federal tax return and can apply the credit to both regular and alternative minimum tax. Tax-exempt employers claim the credit by filing Form 990-T, Exempt Organization Business Income Tax Return, and can receive a refundable credit up to the amount of the employer’s payroll taxes.


Changes in 2014


In 2014, the credit will continue to be available, but with significant modifications. Employers will only be eligible for the credit if they purchase health insurance through the new Small Business Health Options Program (SHOP). The SHOP is one component of the internet-based health insurance marketplace, also known as an exchange, which launches on Oct. 1, 2013.


Other upcoming changes include:

  • The maximum credit increases to 50% (or 35% for tax-exempt organizations)


  • The $50,000 and $25,000 average annual dollar amounts will be indexed for inflation


  • The credit is based on the lesser of the employer’s actual premium payments or the average premiums in the small group market in its employees’ rating area


  • The credit is only available for two consecutive tax years after 2013, but it can be carried back or carried forward

One of the ways in which the Affordable Care Act helps bring down costs for small employers is through the tax credit available to eligible small businesses that provide health care insurance to their employees. The credit significantly offsets the cost of providing insurance and with the 2012 corporate tax filing deadline rapidly approaching (March 15th), you don’t want to let this valuable tax break pass you by.


What is the Small Business Health Care Tax Credit?


Currently the maximum tax credit is 35% for small businesses employers and 25% for small tax-exempt employers (i.e. charities and non-profits). This percentage applies to tax years 2010 through 2013. Even better, in 2014 the credit will increase to 50% for eligible small business employers and up to 35% for tax-exempt employers through the new Small Business Health Options Program (SHOP) Marketplace (also known as the Exchange).


The credit can also be carried back or forward to other tax years. Since the amount of the health insurance premium payments are more than the total credit, eligible businesses can still claim a business expense deduction for the premiums in excess of the credit.  That equals out to both a credit and a deduction for employee premium payments.


Who Qualifies for the Small Business Health Care Tax Credit?


To qualify for the credit, you must meet the following criteria:


  • You must cover at least 50% of the cost of single (not family) health care coverage for each of your employees


  • You must have fewer than 25 full time equivalent employees (2 half-time workers count as one full timer)


  • Those employees must have average wages of less than $50,000 a year


To help determine whether you qualify for the credit, follow this step by step guide from the IRS.


How to Claim the Credit


You must use the IRS Form 8941 to calculate the credit.. Then include the credit amount as part of the general business credit on your income tax return. If you are a tax-exempt organization, include the amount on line 44f of the Form 990-T. You must file the Form 990-T in order to claim the credit even if you do not ordinarily do so. Remember, you may be able to carry the credit back or forward. Be sure to talk to your tax advisor for more assistance.

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