Health Care Tax Credit to Increase in 2014

With the new year, the Affordable Care Act’s health care tax credit for small businesses will increase from 35 percent to a maximum of 50 percent. The tax credit is meant to encourage small businesses and small tax-exempt organizations to begin offering health insurance coverage to their employees or to maintain the coverage they already have.

John Arensmeyer, CEO of the Small Business Majority (SBM), told USA Today that he expects more businesses to take advantage of the tax credit as awareness regarding ACA’s health insurance exchanges spreads. While acknowledging that applying for the credit requires a time commitment, Arensmeyer said that businesses that have applied for the credit have received up to $15,000 in credits. There is no risk in applying for the credit — if a business qualifies, it will receive the credit; if it does not, there is no penalty.

James White, the director of tax issues for the U.S. Government Accountability Office, told USA Today that the law’s complex rules have deterred owners from applying for the credit as they mean a huge time commitment or hiring a preparer; however, he believes that expanding the credit and simplifying the rules could solve the issue.

The tax credit guidance, located on the IRS.gov website, includes a one-page form and instructions small employers can use to claim the credit for the 2013 tax year: the new Form 8941, “Credit for Small Employer Health Insurance Premiums,” and the revised Form 990-T. The IRS has also posted the instructions to Form 8941 and Notice 2010-82, which are both designed to help small employers correctly calculate and claim the credit.

The health care tax credit is available to small employers that pay at least half of the premiums for single health insurance coverage for their employees. Under IRS rules issued in 2010, small businesses that claimed the credit from 2010 through 2013 are eligible to claim it for any two years after that. For tax year 2013, the maximum credit is 35 percent of premiums paid by eligible small businesses. Beginning in tax year 2014, the maximum tax credit will increase to 50 percent of premiums paid by eligible small business employers.

The maximum credit goes to smaller employers — those with 10 or fewer full-time equivalent employees — that pay annual average wages of $25,000 or less. The credit is completely phased out for employers that have 25 or more full-time equivalent employees or that pay average wages of $50,000 or more per year. Because the eligibility rules are based in part on the number of full-time equivalent employees and not the number of employees, employers that use part-time workers may qualify even if they employ more than 25 individuals.

Even small business employers that did not owe tax during the year can carry the credit back or forward to other tax years. Also, since the amount of health insurance premium payments are 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.

Eligible small businesses would first use Form 8941 to figure the credit and then include the amount of the credit as part of the general business credit on their income tax return.

In 2010, when the tax credit first went into effect, a New York Times article described how the credit helped the business of Betsy Burton, the co-owner of The King’s English Bookshop in Salt Lake City, Utah.

More information about the credit, including a step-by-step guide to claiming the credit and answers to frequently asked questions, is available on the Affordable Care Act page on IRS.gov.