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Small Business Employers are Entitled to Tax Credits for Health Insurance

Do not Overlook this Substantial Credit


Changes continue to come in the area of health care insurance. However, believe it or not, we are now nearly two years after the passage of the Affordable Care Act and things are moving along the timeline for the legislation. Barring some action by the courts rejecting the legislation, the Affordable Care Act will be fully implemented by January 1, 2015.

For the small business the single most important aspect of the law is the provision of a tax credit for providing employee health insurance. Now, this is not merely a line deduction - it is a credit towards taxes due. In some instances it may even be possible to receive the credit as a refund.

This credit has been in place since the 2010 tax year.

However, survey after survey and many studies show that approximately half of business owners and small business managers do not take advantage of the credit or had no idea it existed. In this article we will go over the basics of the tax credit.

Is my Business Eligible for the Tax Credit?

To be eligible for the tax credit a business must cover at least 50 percent of the cost of single (not family) health care coverage for each of its employees and it must have fewer than 25 full-time equivalent employees (FTEs). Those employees must have average wages of less than $50,000 a year.

The biggest thing for an employer to understand is what is an FTE? A full-time equivalent employee can be one full-time employee or two part-time employees. Many employers are under the mistaken impression that you must be providing full-time employees health insurance benefits to receive any tax credit and that is not accurate. The IRS website states, as an example,"[b]asically, 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."

Average wages must be less than $50,000 per year. To get the average wage the total payroll is divided by the number of FTE's. So, a restauarant with 20 part-time waitresses and cooks,and a $200,000 per year payroll would have an average wage of $20,000 ($200,000 payroll / 10 FTE's = $20,000).

Another myth is that the business must be a for profit. Not necessarily. Although the credit is lower and there are aditional qualifications, nonprofit organizations can qualify for a credit. Tax exempt organizations may also qualify. There are simple step by step instructions on the irs.gov website for nonprofits and tax exempts to determine if their company qualifies.

How Much is the Credit?

The maximum tax credit is 35% of employee health care costs for small businesses and 25% for nonprofits. This will increase in 2014 to 50% for small businesses and 35% for nonprofits. There is no plan to extend the credit past 2014. The credit is on a sliding scale. The smaller the business the larger the credit. The goal of the credit is to encourage small businesses to provide employees health care insurance coverage.

Remember, the credit applies to employers providing a benefit of 50% of health care insurance to their employees. Again, this point has confused small businesses and their advisors who erroneously believe "full benefits" are needed. The credit is based on health care costs. Conceivably, a plan where an employee matches 50% of the cost of the health insurance policy would still allow for the tax credit.

Let's look at an example. Presume the restaurant mentioned earlier with 10 FTE's had employee health care costs of $50,000. That $50,000 could represent the costs of an employee health care plan with matching deductions from the employees. 35% of $50,000 is $17,500. Presume the restaurant had struggled that year and had a federal tax bill of $20,000 that year. That tax would be reduced by $17,500 leaving a tax liability of $2,500. It is mind boggling that most small businesses know nothing about the credit. That credit would increase to $25,000 in 2014.

Wait There's More!

This is a really powerful tool in the business insurance arsenal. Many business owners may say, "since 2008, my business is struggling, I don't care about tax credits, I don't owe anything." This credit can be carried forward and back and applied in addition to health insurance premium deductions. The IRS explains: "Even if you are a small business employer who did not owe tax during the year, you 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 a deduction for employee premium payments."

The health care tax credit is a significant credit for your small business. Take the time to review form 8941 with your tax and insurance professional.

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