Small Business and Health Care Bill - Obamacare
Small Business and Health Care Bill - Obamacare
This has been a milestone year for healthcare reforms in the US. Among the many changes in the healthcare system, there are some direct benefits and impacts to small businesses and their employees. Weather you like and support what you have seen and heard so far about the health care reform or not, it is important to understand the impact that it is likely to have on the small business landscape in the US over the next few years.
Many small businesses and tax-exempt organizations that provide health insurance coverage to their employees may now qualify for a special tax credit as part of the Patient Protection and Affordable Care Act, approved by Congress and signed by President Obama earlier this year. The tax credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have.
Small businesses can take advantage of this tax credit and add health insurance coverage for their employees. At K&M Accounting and Tax Services we are beginning to see clients leveraging this tax credit to gain a competitive advantage attracting qualified employees that otherwise would not work for a small business.
Small Business Tax Credit for Health Insurance Coverage
Section 45R of the Internal Revenue Code offers tax credit to eligible small employers' including small businesses and tax exempt organizations that provide health insurance coverage to low and moderate income employees.
Small Business eligible for the tax credit
There are specific criteria that help determine the eligibility of small employers:
1. In order to be an eligible small employer' the employer must have fewer than 25 full-time equivalent employees (FTEs) for the taxable year. There may more than 25 employees, some of them working part time, as long as the full time equivalent hours worked is less than 25 FTEs.
2. The average annual wages of employees for the year must be less than $50,000 per FTE (Full time equivalent);
3 The employer must maintain a qualifying arrangement' under which the employer uniformly pays at least 50% of the cost of premiums for each employee enrolled in health insurance coverage.
Calculating the Health Care Tax Credit
The maximum credit is 35 percent of the employer's premium expenses meeting the qualifying arrangement' requirements. If an employer pays only a portion of the premiums for the coverage provided to employees under the arrangement, with employees paying the rest, the amount of premiums counted in calculating the credit is only the portion paid by the employer. For example, if an employer pays 80 percent of the premiums for employees' coverage, with employees paying the other 20 percent, the 80 percent premium amount paid by the employer counts in calculating the credit.
Here is an example of how the tax credit would work for a small business. A retail fast food business with 8 FTEs (Full Time Equivalents) with average wages of $20,000 per FTE, offers a health insurance plan with single and family coverage. The employer pays 50% of the $10,000 premium for all employees enrolled in health insurance coverage and the employee is responsible for the remainder. The amount of premiums paid by the employer for purposes of computing the credit equals $40,000. The employer can claim up to 35% of this amount as tax credit.
Total Cost of Health care premiums = $80,000 (10,000 x 8 FTEs)
Employer cost of premium expense = $40,000 (50% of $80,000)
Potential Tax Credit = $14,000 (35% of 40,000)
If the number of FTEs exceeds 10 or if average annual wages exceed $25,000, the amount of the credit will be reduced using a fraction, the numerator of which is the number of FTEs in excess of 10 and the denominator of which is 15.If average annual wages exceed $25,000, the reduction is determined by multiplying the otherwise applicable credit amount by a fraction, the numerator of which is the amount by which average annual wages exceed $25,000 and the denominator of which is $25,000.
How to Claim the Credit
The credit is claimed on the employer's annual Business Income Tax Return.The credit for a year offsets only an employer's actual income tax liability or Alternative Minimum Tax liability, subject to certain limitations, for that particular year.However, as a general business credit, an unused credit amount can generally be carried back one year and carried forward 20 years.
Keep in mind this column and the articles published here are only meant to provide you with high level information about tax and business matters and in no way should you consider this as tax, financial or legal advice. Consult your tax accountant, financial advisor and legal advisor regarding your specific individual tax and financial situation.
This Article provides only an overview to the complex Tax Laws. It is not exhaustive nor a substitute for Independent Tax Advice provided by a Tax Accountant or a Tax Attorney familiar with your case.
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