IRS Helps Small Business Claim Health Care Tax Credits

The United States Internal Revenue Service (IRS) has released its final guidance, including a one-page form and instructions, for employers eligible to claim the new small business health care tax credit for the 2010 tax year.

Included in the Affordable Care Act enacted in March this year, the IRS confirmed that the small business health care tax credit is designed to encourage both small businesses and small tax-exempt organizations to offer health insurance coverage to their employees for the first time or maintain coverage they already have, reported Tax-News.com.

The new guidance addresses small business questions about which firms qualify for the credit by clarifying that a broad range of employers meet the eligibility requirements, including small employers that cover their workers through insured multi-employer health and welfare plans, and employers that subsidize their employees’ health care costs through a broad range of contribution arrangements.

In general, the credit is available to small employers that pay at least half of the premiums for single health insurance coverage for their employees. It is specifically targeted to help small businesses and tax-exempt organizations that primarily employ moderate- and lower-income workers.

Small businesses can claim the credit in the period from 2010 to 2013, and for any two years after that. For the tax years 2010 to 2013, the maximum credit is 35 percent of premiums paid by eligible small businesses and 25 percent of premiums paid by eligible tax-exempt organizations. Beginning in 2014, the maximum tax credit will increase to 50 percent of premiums paid by eligible small business employers and 35% of premiums paid by eligible tax-exempt organizations.

The maximum credit goes to smaller employers - those with 10 or fewer full-time equivalent (FTE) employees - paying annual average wages of USD25,000 or less per year. The credit is completely phased out for employers that have 25 or more FTEs or that pay average wages of USD50,000 or more per year. Because the eligibility rules are based in part on the number of FTEs, not the number of employees, employers that use part-time workers may qualify even if they employ more than 25 individuals.