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Looking to Reduce Health Care Costs? Check Out This Tax Credit for Small Businesses

Posted by IRS on Fri, Jun 17, 2016

small_business_health_care_tax_credit.jpgIf you are a small business owner, there is a tax credit that can put money in your pocket.

The Small Business Health Care Tax Credit benefits employers that:

  • have fewer than 25 full-time equivalent employees
  • pay an average wage of less than $50,000 a year
  • pay at least half of employee health insurance premiums

 

To be eligible for this credit, you must have purchased coverage through the small business health options program, also known as the SHOP marketplace. For information about insurance plans offered through the SHOP Marketplace, visit Healthcare.gov.

How will the credit make a difference for you?                

For tax years 2010 through 2013, the maximum credit is 35 percent of premiums paid for small business employers and 25 percent of premiums paid for small tax-exempt employers such as charities.

For tax years beginning in 2014 or later, there are changes to the credit:

  • The maximum credit increases to 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers.
  • To be eligible for the credit, a small employer must pay premiums on behalf of employees enrolled in a qualified health plan offered through a Small Business Health Options Program (SHOP) Marketplace or qualify for an exception to this requirement.
  • The credit is available to eligible employers for two consecutive taxable years.

 

Here’s an example of how it can work for a small business:

If you pay $50,000 a year toward employees’ health care premiums — and if you qualify for a 15 percent credit, you save $7,500. If you save $7,500 a year from tax year 2010 through 2013, that’s total savings of $30,000. If, in 2014, you qualify for a slightly larger credit, say 20 percent, your savings go from $7,500 a year to $10,000 a year.

The IRS has several additional examples here.

READ MORE: 5 Steps Businesses Should Consider Now for a Better 2016 Tax Return

Even 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 is 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.

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. Refund limitations may apply. Generally, a claim for refund must be filed within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later, or if no return was filed by the taxpayer, within 2 years from the time the tax was paid.

Tax-Exempt Small Businesses

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

Refund payments issued to small tax-exempt employers claiming the refundable portion of credit are subject to sequestration. Find out more information on sequestration.Note that the Congressional Budget Office estimates that a sequestration for fiscal year 2016 will not be required.

Can you claim the credit?

To be eligible, you must cover at least 50 percent of the cost of employee-only (not family or dependent) health care coverage for each of your employees. You must also have fewer than 25 full-time equivalent employees (FTEs). Those employees must have average wages of less than $50,000 (as adjusted for inflation beginning in 2014) per year.

Remember, you will have to purchase insurance through the SHOP Marketplace (or qualify for an exception to this requirement) to be eligible for the credit for tax years 2014 and beyond. For information about State-based SHOPs participating in the direct enrollment process, such as the one adopted by federally-facilitated SHOP Marketplaces, see the Centers for Medicare & Medicaid Services (CMS) FAQs about flexibilities for State-based SHOP direct enrollment.

READ MORE: 5 Steps Business Owners Should Take Now for the New Overtime Rules

What IS an FTE? Basically, two half-time employees count as one FTE. That means 20 half-time employees are equivalent to 10 FTEs, which makes the number of FTEs 10, not 20.

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

The amount of the credit you receive works on a sliding scale. The smaller the business or charity, the bigger the credit. So if you have more than 10 FTEs or if the average wage is more than $25,000 (as adjusted for inflation beginning in 2014), the amount of the credit you receive will be less.

How do you claim the credit?

You must use Form 8941, Credit for Small Employer Health Insurance Premiums, to calculate the credit. For detailed information on filling out this form, see the Instructions for Form 8941.

If you are a small business, include the amount as part of the general business credit on your income tax return.

If you are a tax-exempt organization, include the amount on line 44f of the Form 990-T, Exempt Organization Business Income Tax Return. You must file the Form 990-T in order to claim the credit, even if you don't ordinarily do so.

We can help you apply for the Small Business Health Care Tax Credit and explore many other tax opportunities available to your business. Contact us at info@concannonmiller.com or 888-433-1515 for more information.

This information came from the IRS. More information can be found here.

Topics: Business tax planning, Business consulting

Concannon Miller’s unique, holistic and intimate approach to financial health sets us apart from smaller CPA firms with more limited resources as well as mega firms where mid-sized clients struggle for attention. Contact us here to talk about improving your business.

This communication is designed to provide accurate and authoritative information in regard to the subject matter covered at the time it was published. However, the general information herein is not intended to be nor should it be treated as tax, legal, or accounting advice. Additional issues could exist that would affect the tax treatment of a specific transaction and, therefore, taxpayers should seek advice from an independent tax advisor based on their particular circumstances before acting on any information presented. This information is not intended to be nor can it be used by any taxpayer for the purposes of avoiding tax penalties.

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