The small business health care tax credit can give your business a boost as you figure out the best way to approach health care offerings — as long as you understand how to take advantage of it. Here’s what you need to know.
What Is This Tax Credit?
The small business health care tax credit exists to give relief to small business employers who offer health insurance to their workforce through the Affordable Care Act. It offers a tax credit of up to 50 percent of premium contributions for small employers or up to 35 percent for small tax-exempt employers.
Businesses can only claim the tax credit for two years in a row, but it can open up some breathing room for organizations that need time to figure out how to budget for health insurance. The size of the credit depends of the size of the business — the smaller the employer, the larger the credit.
How Do I Know If I Qualify?
If all of this sounds too good to be true, here’s the catch: There are a number of requirements your business must meet to qualify for these small business tax exemptions. For starters, as the name suggests, the credit is only for small businesses. This means you must have no more than 25 full-time employees.
Next, the average salary for those full-time employees must come in under $50,000 a year. (Note that this amount is indexed for inflation; in 2017 this meant the line was drawn at an average of $53,000 per employee). These full-time employees don’t include sole proprietor owners, partners, S corporation shareholders who own more than 2 percent, anyone who owns more than 5 percent of the business or family members of any of these exceptions.
For reference, one full-time employee typically works 2,080 hours a year. You can combine part-time employees into one full-time employee, but this can get a little complicated, so look at this explanation from the IRS if you have many part-time workers on staff.
In order to get the tax credit, your business must also offer a qualified health plan through the Small Business Health Options Program (SHOP) Marketplace or qualify for an exception. You also have to cover at least half of the cost of your employees’ health care coverage (not including family members and dependents).
How Do I Apply for the Tax Credit — and What Do I Do With It Once I Have It?
To apply for the tax credit, you’ll need to use Form 8941 to calculate the credit and then include the form with your tax return. The IRS suggests including the tax credit amount as part of your general tax credit on your income tax return. Tax-exempt organizations should include the credit amount on line 44F of Form 990-T.
Small business owners who don’t owe any taxes this year can carry the credit backward or forward and apply it to other tax years. You can also still claim small business tax deductions for the health care premiums you paid that aren’t covered by the credit. If you qualified for the credit and haven’t claimed it during a previous year, you might be able to file an amended return — but this only applies in some situations, so consider talking to your accountant before taking this option. If you’re a tax-exempt organization with no taxable income, you might be eligible to receive the credit as a refund.
Since you can only use it for two years in a row, the tax credit itself is a short-term solution, but with proper planning, it can become part of a solid long-term strategy for making good health plan choices for your employees. As you look further into the credit, remember that the most important part of it isn’t the extra cash it’s leaving in your wallet. Instead, it’s how that money gives your business time to develop strong, affordable health benefits without being bogged down by costs as you refine your package and work out the initial kinks. Great health plan offerings for your business don’t just appear the moment you decide you want to offer health insurance — it takes work to find the best solution. The small business health care tax credit gives you a helping hand as you start that process.
Stay up to date on the latest health care regulations and trends for your small business: Subscribe to our monthly newsletter.
This content is provided solely for informational purposes. It is not intended as and does not constitute legal advice. The information contained herein should not be relied upon or used as a substitute for consultation with legal, accounting, tax and/or other professional advisers.