Claiming the Small Business Tax Credit Under PPACA

07/05/2013

If you’re a small business owner with fewer than 25 full-time equivalent employees you may be eligible for the small business health care credit.

What is the Small Business Health Care Credit?

The small business health care tax credit, part of the Patient Protection and Affordable Care Act enacted in 2010, is specifically targeted to help small businesses and tax-exempt organizations provide health insurance for their employees. Small employers that pay at least half of the premiums for employee health insurance coverage under a qualifying arrangement may be eligible for this credit.

How Does the Credit Save Me Money?

For tax years 2010 through 2013, the maximum credit is 35 percent for small business employers and 25 percent for small tax-exempt employers such as charities. An enhanced version of the credit will be effective beginning Jan. 1, 2014 and the rate will increase to 50 percent and 35 percent, respectively.

Note: The sequester, which took effect on March 1, 2013 includes a reduction to the refundable portion of the Small Business Health Care Tax Credit for certain small tax-exempt employers. As such, the refundable portion of the claim will be reduced by 8.7 percent. Without congressional intervention, this rate remains in effect until the end of fiscal year 2013 (September 30).

The amount of the credit you receive works on a sliding scale, so the smaller the business or charity, the bigger the credit. Simply put, if you have more than 10 FTEs or if the average wage is more than $25,000, the amount of the credit you receive will be less.

If you pay $50,000 a year toward employee’s health care premiums–and you qualify for a 15 percent credit–you’ll save $7,500. If you save $7,500 a year from tax year 2010 through 2013, that’s a total savings of $30,000. And, if in 2014 you qualify for a slightly larger credit, say 20 percent, your savings go from $7,500 a year to $12,000 a year.

Is My Business Eligible for the Credit?

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

A full-time equivalent employee is defined as either one full-time employee or two half-time employees. In other words, two half-time workers count as one full-timer or one full-time equivalent.

If you pay total wages of $200,000 and have 10 FTEs. To figure average wages you divide $200,000 by 10–the number of FTEs–and the result is your average wage. In this example, the average wage would be $20,000.

Can Tax-Exempt Employers Claim the Credit?

Yes. The credit is refundable for small tax-exempt employers too, so even if you have no taxable income, you may be eligible to receive the credit as a refund as long as it does not exceed your income tax withholding and Medicare tax liability.

Can I Still Claim the Credit Even If I Don’t Owe Any Tax This Year?

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.

Can I File an Amended Return and Claim the Credit for Previous Tax Years?

If you can benefit from the credit this year but forgot to claim it on your tax return there’s still time to file an amended return. Businesses that have already filed and later find that they qualified in 2010 or 2011 can still claim the credit by filing an amended return for one or both years.