- New Health Care Law’s Small Business Tax Credit Available to Contractors and Small Businesses
- August 25, 2010 | Authors: Harris T. Booker; Maria D. Elliott; Mark A. Smith
- Law Firm: Barley Snyder LLC - Lancaster Office
- To encourage small employers to offer, or continue offering, health care coverage to their employees, the recently enacted Patient Protection and Affordable Care Act (PPACA) creates a new federal tax credit that could help such employers cover part of the employer cost of the health care coverage. This tax credit was available beginning in 2010, so eligible small employers can begin to benefit almost immediately if they qualify for the credit. This summary focuses only on how the credit will apply to taxable small businesses, but special rules under PPACA also extend this credit to small, tax-exempy employers.
What tax-exempt businesses are potentially eligible for a credit?
To be potentially eligible for a credit, the business must
(1) have fewer than 25 full time equivalent (FTE) employees for the year;
(2) have average annual wages that are less than $50,000 per full time equivalent employee; and
(3) pay all or part of the health care plan premiums for employees under a “qualifying arrangement.” A qualifying arrangement, in general terms, is one where the employer pays a uniform percentage of the health care premium cost and that uniform percentage is at least 50%.
What is the maximum credit available to a small taxable employer?
The maximum annual credit available for years 2010 through 2013 is 35% of the employer’s premium expenses that count toward the credit; this 35% is the credit level that can be claimed by an employer with 10 or fewer FTE employees and avaerage annual FTE wages of $25,000. As the number of FTE employees ranges upward from 10 to 25, or the FTE annual wages range upward from $25,000 to $50,000, the size of the available credit reduces proportionately.
How does the taxable employer actually claim a credit, i.e., how does it get access to credit dollars it is entitled to receive?
A taxable small employer claims the tax credit it is entitled to for a given year on its federal tax return for that year. For taxable employers, however, this is not a "refundable credit," meaning that it can only be taken as an offset against what is otherwise the business's income tax liability. If a small business is eligible for the credit in a year when it has no, or not enough, income tax liability, to fully use up the credit, the unused credit can be carried forward for up to 20 years, or back one year (but not before 2010), to give the business an opportunity to realize a tax savings from the credit.
Is there as yet any published IRS guidance giving more details or examples to help a small taxable employer determine its eligibility for, and the potential amount of, this tax credit?
The IRS has posted on its website 22 Frequently Asked Questions about the small business health care tax credit. These FAQs deal with both taxable and tax-exempt businesses, which are subject to somewhat different rules, but they are nevertheless a helpful resource a tax exempt employer can look to for some further, more detailed guidance. Included are some specific numerical examples about how the available credit reduces when the FTE employee count is above 10 or the average annual FTE wage is above $25,000, how to convert part-time employees into FTE employees, and how to compute FTE average annual wages when there are part time employees. The web address for the IRS FAQs is: http://www.irs.gov/newsroom/article/0,,id=220839,00.html.