IRS Details New Health Care Tax Credit for Small Business

WASHINGTON — The Internal Revenue Service today issued a new advisory intended to make it faster and easier for smaller business owners to take advantage of new health care tax credits under the Affordable Care Act and calculate how large a credit they may receive.

Integrated inside the Affordable Care Act approved by Congress in March and signed into law by the President Obama, the Small Business Health Care Tax Credit is intended to encourage small companies to provide health insurance coverage for the first time or preserve coverage they currently provide.

The advisory makes clear that smaller businesses receiving state health care tax credits may still qualify for the federal tax credit. Also, the plan makes it possible for smaller businesses to receive the credit not only for regular health insurance but also for add-on dental and vision protection.

In general, the tax credit portion of the Affordable Care Act targets small businesses and tax-exempt organizations that primarily hire moderate- and lower-income workers. Small companies that pay out a minimum of half the expense of single coverage insurance policies for their employees in 2010 may qualify for tax credits equal to 25-35 percent of the amount they pay for employee health policies.

For tax years 2010 to 2013, the highest credit available is 35 percent of premiums paid out by eligible small business employers and 25 % of premiums paid for by eligible employers that are tax-exempt organizations. The highest credit goes to smaller employers –– those with 10 or fewer full-time equivalent (FTE) employees –– paying annual average wages of $25,000 or less. The credit is entirely phased out for employers which have 25 FTEs or more or that pay out average wages of $50,000 per year or more. Since the eligibility rules are dependent in part for the number of FTEs, not the number of workers, firms that use part-time help may qualify even if they employ in excess of 25 individuals.

Eligible smaller businesses can claim the credit as part of the basic business enterprise credit starting with the 2010 income tax return they file in 2011. For tax-exempt organizations, the IRS will provide additional details on how to claim the credit.