It may have started in southwest Florida, and the president even visited Fort Myers to address the issue, but we all know this challenging economy has spread throughout our country. As a result, there has been a flurry of tax laws being passed by Congress and signed by the President, and the Internal Revenue Service has quickly issued guidance on the Small Business Health Care Tax Credit. Section 45R of the Internal Revenue Code (Code) offers a tax credit to small employers that provide health insurance coverage to their employees. Section 45R was added to the Code by section 1421 of the Patient Protection and Affordable Care Act enacted March 23, 2010. The Small Business Health Care Tax Credit is available for tax year 2010 and will expire on December 31, 2015. The credit is designed to encourage employers to offer health care coverage to their employees for the first time or maintain coverage already in place. The credit is specifically designed to target small businesses that primarily employ moderate and low income workers.
In order to qualify, an employer must 1) have fewer than 25 full-time employees for the taxable year; 2) have employees with an average annual wage of less than $50,000 per full-time employee; and 3) maintain a qualifying arrangement under which the employer pays the premiums for each employee enrolled in health insurance coverage in an amount equal to a uniform percentage of not less than 50 percent of the premium cost.
It is important to note that sole proprietors, partners in a partnership, shareholders owning more than two percent of an S-Corporation, and any owners of more than five percent of other business are NOT taken into account as employees for purposes of the credit. In addition, owner’s family members are also excluded in determining eligibility for the credit.
The Small Business Health Care Tax Credit is effective immediately; employers need to plan now in order to take advantage of it. For tax year 2010 through 2013, the maximum credit available is 35 percent of the premiums paid by eligible small business employers. For tax years beginning after 2013, the credit is only available to an eligible small employer that purchases health insurance coverage for its employees through a state exchange and is only available for two years. The maximum two-year coverage period does not take into account any tax years beginning in years before 2014. Thus, an eligible small employer could potentially qualify for this credit for six years, four years under the first phase and two years under the second phase.
The maximum credit goes to smaller employers, those with fewer than 10 employees, paying annual average wages of $25,000 or less. The credit is completely phased-out for employers with more than 25 employees or annual average wages of $50,000 or more. The phase-out of the credit amount under section 45R(c) of the Code operates in such a way that an employer with exactly 25 full-time employees or with average annual wages exactly equal to $50,000 is NOT, in fact, eligible for the credit.
Example: Company X employs nine full-time employees with an average annual salary of $24,000 for 2010. Under a qualifying arrangement, Company X pays $12,000 in health care premiums for its employees. (This amount does not exceed the average premium for small group market in the employer’s state) and otherwise meets the requirements for the credit. Company X’s credit for 2010 is $4,200 (35 percent X $12,000).
The Small Business Health Care Tax Credit is claimed on an eligible small employer’s annual income tax return as a general business credit and offsets an employer’s actual tax liability for the year. Any unused credit amount can be carried back one year and carried forward 20 years. Since the effective date of the credit is 2010, any unused credit can only be carried forward.
It is the desire of Hill, Barth & King to keep businesses and individuals of Fort Myers, Cape Coral and the surrounding areas up to date on tax law changes that could have a significant impact on their financial well-being.
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Julio Barina, CPA is a Supervisor with Hill, Barth & King LLC in the Fort Myers, Florida office. He has been with Hill, Barth & King, LLC, a top 75 accounting firm since relocating to Southwest Florida in 2006. Julio can be contacted by phone at 239-482-5522 or via email at firstname.lastname@example.org