Far fewer small businesses than expected have taken advantage of a new tax break for providing health insurance coverage to their employees. Despite efforts by the IRS to promote the credit, including sending out 4.4 million informational postcards to businesses that could potentially be eligible for it, only about 309,000 small businesses and their owners have taken advantage of the health care credit.
The tax credit is generally available to businesses that pay for at least half of the cost of their employees’ health care, have fewer than 25 employees and pay them an average of $50,000 or less per full-time employee. Both taxable and tax-exempt firms qualify.
For 2010 through 2013, the credit is worth up to 35% (25% for tax-exempt employers) of a small business’s premium costs. This amount increases to 50% (35% for tax-exempt employers) in 2014. The credit phases out gradually for firms with average wages between $25,000 and $50,000 and for firms with the equivalent of between 10 and 25 full-time workers.
Businesses cannot take a tax credit for insurance premiums paid for owners of the business (e.g., owners of corporations, partners in a partnership, and sole proprietors). For small businesses structured as C corporations, no tax credit is available for employees who own more than 5% or more of the corporation. For S corporations, no tax credit is available for employees who own 2% or more of the S corporation.
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