Don’t forget about a special tax credit for small businesses buried in the massive health care legislation—the Patient Protection and Affordable Care Act (PPACA)—passed in 2010.
Strategy: Determine if your small business qualifies for the credit. The credit can offset part of the cost of providing health insurance to your staff.
Most provisions in the PPACA are scheduled to take effect in the future, but the health care credit for small businesses is already there for the taking.
Here’s the whole story: Beginning in 2010, a small business may be eligible for the credit if it purchases health insurance for its employees. To qualify, the business can’t have more than 25 full-time employees with average annual wages above $50,000. The contributions must be made under an arrangement requiring the employer to make nonelective contributions to health insurance offered to enrolled employees equal to at least 50% of the premium cost.
Currently, your small business can generally claim a credit equal to 35% of the cost of its qualified employer contributions (25% for tax-exempt organizations). In 2014, this credit percentage is scheduled to increase to 50% of the contributions if you participate in a state-run insurance exchange (35% for tax-exempt organizations). The 35% credit phases out, but not below zero, if a qualified small business exceeds either of the two limits (see box below).
Biggest tax break is for smallest employers: If your business employs 10 or fewer full-time employees with average annual wages of no more than $25,000, it can qualify for the maximum credit equal to 35% of eligible employee health costs. Once the number of employees exceeds 10 or the average wage exceeds $25,000, the credit begins to phase out. Phaseout is complete when the number of employees reaches 25 or the average wage reaches $50,000.
For purposes of the credit calculation, the number of full-time employees is determined by dividing the total hours for which you compensate employees (but not more than 2,080 hours per employee) divided by 2,080. When appropriate, round up to the next lowest whole number.
The IRS offers the following example of the credit phaseout rule.
Facts: A restaurant employs 40 part-time workers (the equivalent of 20 full-timers). It pays total wages of $500,000 or $25,000 per full-time equivalent worker. The employee health care cost is $240,000. After applying the credit phaseout rule, the restaurant can claim a credit of $28,000.
In a series of frequently asked questions posted on its web site, the IRS also clarifies that the calculation doesn’t include sole proprietors, partners in a partnership, more-than-2% shareholders in an S corporation and individuals owning more than 5% of another business. Family members of these individuals are also excluded. So you may not have to worry about distorting the average annual salary figure if you and any relatives working in your business are paid high salaries.
For more answers to FAQs, see http://tinyurl.com/healthcarecredit. This site will also direct you to an IRS video on the topic.
Tip: Claim the credit on Form 8941, Credit for Small Employer Health Insurance Premiums. The credit amount is included in the general business credit for your firm.
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