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Tax Credits for Small-Business Health-Care Costs in 2010 - What is the definition of a “Small Business”?

One of the first provisions of the Patient Protection and Affordable Care Act to go into effect is a health-care tax credit for small businesses and tax-exempt organizations. This credit is effective for tax years 2010 through 2013 and is designed to encourage small businesses and certain tax-exempt organizations to begin providing health-care coverage for their employees or continue the coverage they currently have. So is the definition of a small business the same as we have heard described for other tax incentives and disincentives? Well, of course, the devil is in the details.

Small businesses and qualified tax-exempt organizations that qualify for the maximum credit are defined as employers having 10 or fewer full-time-equivalent employees (FTEs) with average wages of less than $25,000. The credit is phased out for employers with more than 10 but fewer than 25 FTEs and average wages between $25,000 and $50,000. The number of FTEs is determined by dividing the total hours for which the employer pays wages, but not greater than 2,080 per employee, by 2,080. Average annual wages are determined by dividing total wages paid by the employer to employees during the year by the number of the employer’s FTEs.

Since the credit is based on full-time equivalents, it is possible for an employer with more than 50 employees to qualify for the credit if many of their employees are part-time help. Business owners, including partners in a partnership, sole proprietors, and 2% or more shareholders in an S Corporation, and their family members do NOT count as employees; therefore, their wages and hours are not included in the limitation.

The credit is based on a percentage of the premiums employers pay for their employees and is capped by the average premium for the small-group market in a state determined by the Department of Health and Human Services and published by the IRS. The employer must pay for over 50% of the cost of coverage in order to qualify, and can take a credit for 35% of the actual premiums paid by the employer. The amount of the credit reduces the deduction that the employer takes for insurance premiums, thereby changing a deduction into a credit. Tax-exempt organizations can claim a credit for 25% of the premiums paid but cannot exceed the total amount of income and medical tax (both employee and employer share) for the employee. For an example of how to calculate the credit please click on this example.

The credit is claimed on the employer’s 2010 tax return and can offset both regular tax and alternative minimum tax. The IRS will provide future guidance on how a tax-exempt employer claims the credit, which is refundable. For qualified small businesses, the credit is a general business credit, and if the credit exceeds the amount of tax for the year, the unused credit may be carried back one year, or forward twenty. For 2010, the credit is only allowed to be carried forward, since you cannot carry back the credit to a year before the credit was effective.

This credit is the first of many changes that the Patient Protection and Affordable Care Act will create. It was intended to promote health-care coverage for small businesses that employ low- and moderate-income workers. If you have been considering offering health insurance for your employees, and you qualify for this credit, this may be a great incentive to start offering health insurance.

For further questions or comments, please contact Bailey Maenner at 312-980-3248, Teri Newman at 312-980-2926 or your Blackman Kallick representative.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.