Small Business Health Care Tax Credit

The President’s Council of Economic Advisors estimates that four million small businesses are eligible to claim the new Small Business Health Care Tax Credit.

For tax years beginning in 2010, eligible small businesses and tax-exempt organizations may claim a tax credit for a portion of the cost of either (1) maintaining their current health insurance coverage or (2) beginning to offer health insurance coverage to their employees.

In 2010, the maximum credit is 35 percent of premiums paid by eligible small businesses and 25 percent of premiums paid by eligible tax-exempt organizations. In 2014, the maximum credit will increase to 50 percent and 35 percent, respectively.

A small business will be considered a “qualified employer” and, therefore, eligible for this credit if:

1. It has fewer than 25 full-time equivalent employees (“FTEs”) for the tax year;
2. The average annual wages of its employees is less than $50,000 per FTE; and
3. It pays its health insurance premiums under a “qualifying arrangement.”

A qualifying arrangement is one in which the employer pays at least 50 percent of the total premium cost for each employee.

The employer may claim this non-refundable credit on its annual income tax return. Any unused credit may be carried back for one year (with the exception of credits that could have been claimed in 2010) or carried forward for 20 years. The credit may only be used to reduce income tax – it cannot be used to reduce an employer’s employment tax obligations.

This credit is intended to exist alongside the employer’s deduction for the cost of health insurance premiums. However, it should be noted that the employer’s deduction must be reduced by the amount of the credit claimed.

In the near future, the IRS is expected to provide additional guidance on how tax-exempt employers may claim the credit.