Health Care Reform Primer: Small Business Tax Credit

I suspect that many of the readers of this blog are small business owners or employees of small businesses, so this section of the federal Patient Protection and Affordable Care Act may be of special interest. These provisions actually took effect with the 2010 tax year, so qualifying businesses should already have seen some of these tax benefits. Small business tax credits for health insurance apply to employers that:

• Have no more than 25 full-time equivalent employees (FTE's) for the tax year
• Have average annual wages of no more than $50,000 for tax years 2010 through 2013 or $50,000 plus a cost-of-living adjustment for tax years 2014 and later
• Have arrangements that require the employer to make contributions (at least 50 percent of the premium) on behalf of employees who enroll in the employer's sponsored health plan offered through an exchange.

The law provides formulas for determining the number of FTE's and average annual wages. The formula for calculating FTE's exempts a single employee's hours in excess of 2,080 and the hours worked by seasonal workers who are on the job for 120 days or less during the tax year.

The credit for a for-profit business is 35 percent (50 percent after 2013) of:

• The total amount of the employer's contributions during the tax year for employee health coverage obtainted through an exchange, or
• The total amount of contributions the employer would have made during the tax year if each employee had enrolled in a health plan that had a premium equal to the average for the small group market in the local rating area

Whichever is less. The amount of the credit is reduced if the employer has FTE's greater than 10 and annual average wages that exceed $25,000 in 2010 through 2013 and $25,000 plus cost-of-living for years after 2013.

Tax-exempt small employers (essentially, 501(c) employers) are also eligible for credits. They get 25 percent (35 percent after 2013) of the lesser of:

• The total amount of the employer's contributions during the tax year for employee health coverage obtainted through an exchange, or
• The total amount of contributions the employer would have made during the tax year if each employee had enrolled in a health plan that had a premium equal to the average for the small group market in the local rating area

or the amount of the employer's payroll taxes for the tax year, again whichever is less.

For all employers, the health insurance credit is part of the general business credit, and it can be taken against the alternative minimum tax. If an employer takes the credit, it cannot also deduct health insurance expenses from its taxable income. 

The next post will look at the source of much litigation and controversy: The individual mandate.

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Comments

[penny stocks to watch]

We are all well investors and health is essential than finance. Your article revealed a truth that similarity between financial markets and health care is true which you have elaborated above.

[Peter Lewis]

This has come a bit late, this is what they should have been doing in 2008/09 to start stimulating local growth and employment. Such an easy way to create employment and provide local fiscal activity. Tax doesnt have to be taxing!