Small Business Health Care Tax Credit – What to Know

Small businesses have become increasingly prevalent in recent years. With the Small Business Health Care Tax Credit, small businesses have another tool to help them prosper for years to come. In order to be eligible for the tax credit, there are some requirements that a small business must meet:

1. Employ less than 25 full-time equivalent employees
2. Pay at least half of the health insurance premiums for their employees
3. Pay an average wage of $50,000/year or less
4. Have bought coverage through the Small Business Health Options Program

Normally, the rule states that a refund claim must be filed within three years of filing the return or within two years of paying the tax; whichever of the periods expires later. In order to receive the credit, Form 8941 (Credit for Small Employer Health Insurance Premiums) must be attached to the annual tax return.

For a tax-exempt organization, it is necessary to attach Form 990-T (Exempt Organization Business Income Tax Return) to Form 8941 showing how the claimed credit was calculated.

Helpful Information to Know

No Taxable Income? No Problem – For Some: A tax-exempt employer may claim the credit even if they have no taxable income for the year. The credit may be received as a refund if it does not surpass the employer’s income tax withholding and Medicare tax liability. However, refund payments are subject to sequestration. On the other hand, an employer that is not considered tax-exempt cannot generally take the tax credit.

Maximum Credit Increase: For small business employers, the maximum credit increased from 35% to 50% of premiums paid. And for small tax-exempt employers, the credit went from 25% to 35% of premiums paid.

The Credit in Successive Years: Beginning with 2014, the credit can be only claimed for two successive taxable years. The first year commences on or after 2014 when the small employer fills out Form 8941.

Employers Located Outside of the U.S: A small business owner outside of the U.S. must meet the requirements for claiming the credit and have income linked with the conduct of a trade or business within the U.S.

How Does the Credit Affect the Deduction for Health Insurance Premiums? The maximum deduction allowed based on insurance premiums is decreased by the credit amount. Therefore, a credit and partial deduction can both be claimed for the same premium payments.