Small Business Health Care Tax Credit
Most tax related provisions in the massive Health Care Reform law enacted in March are effective after 2010. One exception is the Small Business Health Care Tax Credit, which is effective for 2010.
Small businesses and small tax-exempt organizations have an opportunity to receive a tax credit up to 35% (25% for tax-exempt organizations) of the lesser of health insurance premiums paid or the average group premium for small companies in the employer’s state. The employer must pay at least 50% of the overall premium to qualify for the credit. In 2010 only, for employees with family coverage, the employer only has to pay at least 50% of the single coverage premium to qualify. The credit for tax-exempt organizations is subject to additional limitations.
Two limitation calculations must be completed, which can reduce or eliminate the credit.
Limitation 1: The employer must have fewer than 25 full-time equivalent employees (FTEEs) for the taxable year. If total FTEEs is 10 or less, no credit reduction applies. If total FTEEs is between 11 and 24, the credit is reduced by 6.667% for each FTEE above 10. If total FTEEs equal or exceed 25, no credit is allowed.
To determine FTEEs, you must calculate the total number of hours for which employees were paid. Excluded from the calculation are hours related to the following:
- Greater than 2% owners of S corporations
- 5% owners of C corporations
- Sole proprietors and partners
- Family members of the above (to include nieces, nephews, aunts and uncles)
- Seasonal workers who worked less than 120 days
- Hours over 2,080 for a single employee
Once the total hours for qualified employees are determined, divide the hours by 2,080 and round the results down to the nearest whole number. The result is the number of FTEEs for the year.
Limitation 2: Average annual wages must be less than $50,000 per FTEE. If average annual wages are $25,000 or less, no credit reduction applies. If average annual wages are between $25,000 and $50,000, the credit is reduced by 4% for each $1,000 of wages above $25,000. If average annual wages are over $50,000, no credit is allowed.
To determine average annual wages, you must calculate total wages paid during the year and subtract wages associated with the excluded workers noted above (except for the wages associated with hours above 2,080, which are included in this calculation). Once the total adjusted wages is determined, divide by the number of full-time equivalent employees determined in the previous limitation and round the results down to the nearest $1,000.
Each of the computed limitations is subtracted from the tentative credit to determine the actual amount of credit the business is entitled to. The credit is a general business credit and is non-refundable for small businesses, which means it can only be used to offset a tax liability. Any unused credit amount can be carried back one year (for tax year 2011 and beyond) and carried forward 20 years (starting in 2010). However, the credit is refundable for tax-exempt organizations. We expect guidance with be forthcoming from the IRS as to how a tax-exempt organization is to claim this refund.
For more information, please contact your ARB tax advisor or visit www.irs.gov.