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New Rx for small biz health credit

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in Small Business Tax,Small Business Tax Deduction Strategies

The most onerous rules for em­­ployers and employees included in the massive 2010 health care law—the Patient Protection and Affordable Care Act (PPACA)—have yet to take effect. But qualified small business owners may already benefit from a generous tax credit for providing health insurance coverage to workers.

Alert: The Treasury Department has just issued new proposed regulations on the credit. (REG-113792-13, 8/23/13)

Here’s the whole story: Under the PPACA, a small business is eligible for credit if it contributes to health insurance coverage for its employees. To qualify, the business must have fewer than 25 full-time employees (FTEs) with average annual wages of less than $50,000 (see box below). The credit is reduced if you exceed either of these two limits.

The credit first became available in 2010. For the first four years, including 2013, the maximum credit is equal to 35% of the nonelective contributions made on behalf of employees. However, the maximum 35% credit is only available if the employer has 10 or fewer full-time employees and an average wage of less than $25,000. Beginning in 2014, the maximum credit increases to 50% of allowable contributions.

Following are several key areas covered in the new proposed regulations:

Eligibility issues: An employer may be able to claim the credit for employees who aren’t performing services in a trade or business (e.g., household employees). Also, foreign entities with U.S. income are eligible only if they pay premiums for health insurance coverage issued in and regulated by one of the 50 states or the District of Columbia. Sole proprietors, partners in a partnership, 2%-or-more owners of S corporations and any 5%-or-more business owners, as well as their family members, don’t count as employees for this purpose.

Qualifying arrangements: An employer must pay premiums for each employee enrolled in health insurance coverage in an amount equal to a uniform percentage (not less than 50%) of the premium cost. If an employer is entitled to a state tax credit or a premium subsidy, this amount isn’t included in this test, but it is figured into the credit calculation.

State exchanges: For 2014 and thereafter, an employer must obtain health insurance through the Small Business Health Options Program (SHOP). Because these state-run exchanges are just being set up, an employer can still qualify for a credit in 2013 by obtaining insurance from an outside source.

Time limit: Beginning in 2014, a new two-year limit applies after the first year the employer files Form 8941, Credit for Small Employer Health Insurance Premiums. If you claim the credit prior to 2014, you can still take the credit for two more years in 2014 and later. If an entity’s predecessor entity claimed the credit in the past, the predecessor’s period will count toward the two-year credit period.

Tip: The new regs also provide transitional rules for employers that don’t operate on a calendar year (e.g., if your tax year begins after Jan. 1, 2014, but before Jan. 1, 2015).

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