Healthcare Tax Credit for Small Businesses and Tax-Exempt Organizations

March 13, 2012

It is tax season, and while much of spring is spent discussing what must be paid out in taxes, it is also a great time to take advantage of savings opportunities.

For small businesses, one of the greatest expenditures, healthcare, can now offer additional savings this tax season. The Affordable Care Act (enacted March 2010) intends to help small businesses and tax-exempt organizations afford the cost of providing healthcare to their employees. In particular, the credit is focused on helping employers with low and moderate income workers, and encouraging employers to offer health insurance for the first time or maintain the coverage that they already have.           

The Small Business Healthcare Tax Credit provides a credit worth up to 35% of eligible small businesses’ premium costs through 2013. Even if a business did not owe tax in 2011, the credit can be carried back or forward for other tax years. Non-profits are also eligible to receive a tax credit of up to 25% of the cost of the organization’s premium through 2013. Even if a business has no taxable income, they may be eligible to receive the credit as a refund. This is particularly beneficial to tax-exempt organizations. In 2014, the rate increases to 50% for small businesses and 35% for non-profits. 

To be eligible, a business or tax-exempt organization must meet the following requirements: 

  1. The employer must cover at least 50% of the premium for healthcare coverage based on the single employee-only rate.
  2. The employer must have less than the equivalent of 25 full-time workers (for example, an employee with fewer than 50 half-time workers may be eligible).
  3. The employer must pay average annual wages below $50,000. The credit will gradually phase out for businesses with average wages between $25,000 and $50,000.

The credit will phase out based on wages and for businesses with the equivalent of between 10 and 25 full-time workers. The IRS provides a sheet of sample scenarios to illustrate how the credit would be applied in different circumstances.

In order to help small businesses and tax-exempt organizations determine if they are eligible, the IRS has developed a fact sheet to assist employers in determining whether they qualify for the Small Business Health Care Tax Credit. There are three steps to determine the size of the business, the average wages, and the amount of the insurance premium paid by the employer for employees at the single “employee-only” coverage rate. Employers must use the IRS Form 8941 to calculate and claim the credit which will be included as part of the general business credit on income tax returns. For tax-exempt organizations, the credit is included on line 44(f) of the IRS Revised Form 990-T. If you are unsure if you qualify for the credit, you may want to check with a tax professional for assistance.

Derek Dissinger is a lawyer at Russell, Krafft and Gruber LLP in Lancaster, Pennsylvania. He received his law degree from Duquesne University and practices in a variety of areas, including Business Law and Taxation.