The Patient Protection and Affordable Care Act (Obamacare) contains a provision for a tax credit for small businesses to help them afford the cost of providing employee health insurance. The tax credit is up to 35 percent of the premiums a for-profit small business pays to cover its workers. In 2014, the top rate will increase to 50 percent for those for-profit entities that purchase coverage through the new state health insurance exchanges.
The credit was effective January 1, 2010. Small businesses are eligible for immediate help with the costs of employee health insurance premiums. The Congressional Budget Office estimates that the tax credit will save small businesses $40 billion by 2019.
Both small for-profit businesses and small not-for-profit businesses are eligible for the tax credit. The credit is refundable for not-for-profit businesses, so even if a not-for-profit business has no taxable income, it may be eligible to receive the credit as refund so long as it does not exceed the business’s income tax withholding and Medicare tax liability. Tax-exempt organizations are eligible for a 25 percent tax credit. This rate increases to 35 percent in 2014.
Qualifying small businesses must have less than the equivalent of 25 full-time employees, pay average annual wages below $50,000 and cover at least 50 percent of the cost of employee health care premiums. The credit phases out gradually for small businesses with average wages between $25,000 and $50,000 and for businesses with the equivalent of between 10 and 25 full-time employees. To avoid an incentive to choose a high-cost plan, an employer’s eligible contribution is limited to the average cost of health insurance in that state.
The credit can be claimed for a total of six years, 2010 through 2013, and for any two subsequent years. A for-profit 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. That’s both a credit and deduction for employee premium payments.
If a business can benefit from the credit this year but forgot to claim it on its tax return it may file an amended return.
Form 8941, Credit for Small Employer Health Insurance Premiums, is used to calculate the credit. Small businesses should include the amount of the credit as part of the general business credit on their income tax forms.
Tax-exempt organizations should include the amount on line 44f of Form 990-T, Exempt Organization Business Income Tax Return. A not-for-profit business that is not ordinarily required to file the Form 990-T must do so to claim this credit.
Click here for more information on the Health Care Tax Credit.
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