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The Small Business Healthcare Tax Credit


There is a small hidden gem of a deduction for small business owners in The Patient Protection and Affordable Care Act (PPACA), commonly called “Obamacare”, which was ruled constitutional by the Supreme Court just last summer. This law entitles certain small businesses to a credit of up to 35% (a maximum of $51,000) of the amount they spend on employee health insurance for tax years 2010, 2011 and 2012. The credit increases to up to 50% (a maximum of $73,500) of the amount they spend on employee health insurance in 2013 through 2015.

The credit is for companies that have 25 or fewer full time employees, and have average annual compensation of non-owner employees of $50,000 or less. In addition, the employer must pay at least 50% of the employee’s healthcare premiums.

Most businesses have not claimed this credit since 2010 due to the complexity of the law!

You could be eligible for substantial credits. The PPACA is perhaps the most broad reaching tax legislation we’ve seen in decades. Most CPAs are not completing this analysis due to the complexity involved. According to the Government Accounting Office, as many as 4 million small businesses may be eligible for the tax credit, yet fewer than 171,000 have taken advantage of it. This means 95% of those eligible are not taking advantage of this program. It is important that you find out if you are eligible.

In order to determine if you are eligible for the credit you must answer the following questions:

  • Do you provide health insurance for your employees?
  • Does the company pay for at least 50% of the employee portion of the insurance?
  • Does your company have fewer than 30 FTE’s?
  • Is the total compensation of employees (not including owners and their family members) approximately $1.5 million or less?

The credit is calculated using a series of analyses as to the number of Full-Time- Employees or equivalent (as opposed to part-time and/or seasonal employees) and there is a specific method of quantifying the earnings of part-time and seasonal employees. These figures are compared to state specific maximums and then quantified. So, the total amount of the credit in any one year is limited on a state by state basis. Employers face phase-outs for:

  1. Having more than 10 FTE’s
  2. Having average compensation over $25,000
  3. Tax-exempt organizations have special rules
  4. There are other limitations as well

You will need a list of your employees and certain related information about how many hours and weeks they worked, if they were full-time or part-time, the amount withheld from their pay for health insurance and whether or not they are owners or family members of owners. Most of this is easily obtainable from your payroll processor such as ADP or Paychex.

In addition, you need information about the amount of money you spent on employee health insurance and a few other easily obtained pieces of information.

Source: Kellog & Andelson Accountancy Corporation Small Business Healthcare Tax Credit Quick Reference Guide

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