Posted on April - 13 - 2010
New Health Care Tax Credit Encourages Small Businesses to Provide Coverage
Included in the Patient Protection and Affordable Care Act is a tax credit designed to encourage small businesses to provide health coverage to their employees. Effective for tax years beginning in 2010, the credit equals a percentage of the employer contribution to employee health care plans, provided that coverage equals at least half of the overall plan. The credit will increase for small businesses when state-run marketplaces come into effect in 2014.
“This credit provides a real boost to eligible small businesses by helping them afford health coverage for their employees,” said IRS Commissioner Doug Shulman. “We urge small businesses and tax-exempt employers to look closely at this important tax break — which is already effective — to see if they qualify.”
In order to qualify, a business must have fewer than 25 full-time employees and pay annual wages of less than $50,000 per year. While the first qualification includes only full-time employees, the annual wage calculation will include all employees on payroll. The maximum credit will be given to smaller businesses with fewer than 10 full-time employees and average annual wages of less than $25,000.
The IRS provided the following two examples:
Example 1: Main Street Mechanic
Auto Repair Shop with 10 Employees
Gets $24,500 Credit for 2010
Employees: 10
Wages: $250,000 total, or $25,000 per worker
Employee Health Care Costs: $70,000
2010 Tax Credit: $24,500 (35% credit)
2014 Tax Credit: $35,000 (50% credit)
Example 2: Downtown Diner
Restaurant with 40 Part-Time Employees
Gets $28,000 Credit for 2010
Employees: 40 half-time employees (the equivalent of 20 full-time workers)
Wages: $500,000 total, or $25,000 per full-time equivalent worker
Employee Health Care Costs: $240,000
2010 Tax Credit: $28,000 (35% credit with phase-out)
2014 Tax Credit: $40,000 (50% credit with phase-out)
Small businesses can begin claiming this credit on 2010 returns. If you have any questions as to the availability of this credit for your business, please contact the tax professionals at CB&H.
For IRS quick tips on this issue,
For the IRS FAQ on Small Business Health Coverage Tax Credit,
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