IRS explains Small Business Health Care Tax Credit

Posted 19 May 2010

The IRS recently released guidance on the new Small Business Health Care Tax Credit which passed under the Affordable Care Act approved by Congress in March and signed into law by President Obama. The guidance is intended to make it easier for small businesses to determine whether they are eligible for the new health care tax credit and how large a credit they will receive. IRS Notice 2010-44 provides guidance on the credit, including guidance for determining eligibility for the credit, calculating the credit and claiming the credit.

The small business health care tax credit, which is in effect this year, is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. The credit is available to small employers that pay at least half the cost of single coverage for their employees in 2010. The credit is specifically targeted to help small businesses and tax-exempt organizations that primarily employ moderate- and lower-income workers. Small businesses receiving state health care tax credits may still qualify for the full federal tax credit. Small businesses are permitted to receive the credit not only for regular health insurance but also for add-on dental and vision coverage. For tax years 2010 to 2013, the maximum credit is 35% of premiums paid by eligible small business employers and 25% of premiums paid by eligible employers that are 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 $25,000 or less. The credit is completely phased out for employers that have 25 FTEs or more or that pay average wages of $50,000 per year or more. Because the eligibility rules are based in part on the number of FTEs, not the number of employees, businesses that use part-time help may qualify even if they employ more than 25 individuals. Eligible small businesses can claim the credit as part of the general business credit starting with the 2010 income tax return they file in 2011. For tax-exempt organizations, the IRS will provide further information on how to claim the credit.

More information about the credit, including a step-by-step guide and answers to frequently asked questions, is available on the Affordable Care Act page on the IRS website. IRS Notice 2010-44 is posted on and provides detailed guidelines, illustrated by more than a dozen examples, to help small employers determine whether they qualify for the credit and estimate the amount of the credit.

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