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Seize small business health credit

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in Small Business Tax,Small Business Tax Deduction Strategies

The U.S. Supreme Court is hearing arguments about the constitutionality of the massive health care legislation enacted in 2010. Most of the provisions in the new health care law won’t kick in until 2013 or 2014.

Alert: Small business owners don’t have to wait. If you qualify, you can claim a special tax credit for pro­­viding health in­­surance to em­­­­ployees. The credit be­­came available in 2010.

The IRS recently issued guidelines on how a small business may claim the credit. (IRS Internal News Release 2012-33)

Here’s the whole story: Under the 2010 health care law, a small business is eligible for credit for contributions used to purchase 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 credit is reduced if you exceed either of these two limits (see box below).

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 claim a credit of up to 35% of the cost of its qualified employer contributions. After 2013, the maximum credit increases to 50% of the contributions if you participate in a state-operated insurance exchange.

This 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 won’t distort the average annual salary if you and any relatives working in your business are paid high salaries.

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 to the nearest whole number.

Example: Your small business has a total of 10 employees on the payroll in 2012. Five are paid wages based on 2,080 hours for the year, one is paid based on 2,400 hours and the remaining four are paid for 1,040 hours. The calculation is as follows:

Employees working 2,080 hours: 2,080 hours x 5 employees = 10,400 hours
Employees working 2,400 hours: 2,080 hours x 1 employee = 2,080 hours
Employees working 1,040 hours: 1,040 hours x 4 employees = 4,160 hours

17,360 total hours ÷ by 2,080 hours = 8.35

Round down 8.35 to 8 full-time employees.

As you can see, an employer with more than 25 employees may still qualify for the credit if it employs part-time workers. Caveat: Seasonal workers are excluded from the calculation.

Tip: The provision for the small business health care credit is separate from the emotionally charged issue of mandated individual coverage.

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