Small Business Health Care Tax Credit (Code Sec. 45R)

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This tax credit helps small businesses and small tax-exempt organizations afford the cost of covering their employees and is specifically targeted for those with low‐ and moderate‐income workers. The credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees.

For tax years 2010 through 2013, the maximum credit is 35% for small business employers and 25% for small tax‐exempt employers such as charities. (See Code Sec. 45R(g).)

An enhanced version of the credit (50%) will be effective beginning Jan. 1, 2014. Additional information about the enhanced version will be added to as it becomes available. In general, on Jan. 1, 2014, the rate will increase to 50% and 35%, respectively.

A small business employer who did not owe tax during the year can carry the credit back or forward to other tax years. Also, since the amount of the health insurance premium payments are more than the total credit, eligible small businesses can still claim a business expense deduction for the premiums in excess of the credit.

To be eligible, the employer must cover at least 50% of the cost of single (not family) health care coverage for each of its employees. The employer must also have fewer than 25 fulltime equivalent employees (FTEs) and those employees must have average wages of less than $50,000 a year.

What is a full‐time equivalent employee? Basically, two half‐time workers count as one full‐timer. Here is an example, 20 half‐time employees are equivalent to 10 full‐time workers. That makes the number of FTEs 10, not 20. Example: assume the employer pays total wages of $200,000 and has 10 FTEs. To figure average wages divide $200,000 by 10 – the number of FTEs – and the result is the average wage; the average wage would be $20,000.

Also, the amount of the credit the employer receives works on a sliding scale. The smaller the business or charity, the bigger the credit. So if the employer has more than 10 FTEs or if the average wage is more than $25,000, the amount of the credit it will receive will be less. Taxpayers must use Form 8941, Credit for Small Employer Health Insurance Premiums, to calculate the credit. A small business will include the tax credit as part of the general business credit on its income tax return.

This information is shared from a recent CPE Link webcast featuring speaker, Dennis J. Gerschick, Attorney, CPA, PFS, CFA. Get a complimentary recording of the full one-hour webcast Tax Implications of the Upheld Patient Protection and Affordable Care Act.


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