How large is the credit?
Only the amount of insurance premiums paid by the employer, and not paid by the employee, are used in calculating the credit. For tax years beginning in 2010 through 2013, the credit is 35 percent of the employer’s contributions toward the employee health insurance premiums. For years beginning after 2013, the credit increases to 50 percent.
For example: In 2010, an auto repair shop has 10 employees. The total amount of wages paid to the employees is $250,000. The average annual wages are $25,000. If the auto repair shop pays employee health care costs of $70,000, its 2010 tax credit is $24,500 (35 percent × $70,000).
The credit begins to phase out as the number of full-time employees and average wages increase and is completely phased out once there are either more than 25 employees or average annual wages exceed $50,000.
An adjustment to health insurance premiums deducted as an ordinary business expense must be made for those premiums taken with regard to this credit.
For example: In year 2014, employer XYZ Company is entitled to a $4,000 small employer health insurance credit as a result of making $8,000 of nonelective contributions for premiums for qualified health plans on behalf of its two FTE employees. XYZ Company has to reduce its otherwise allowable deduction for employee health insurance expenses by the amount of the small employer health insurance credit to $4,000 ($8,000 minus $4,000).
How do eligible companies claim the credit?
The small employer health insurance credit is claimed as part of the general business credit and is not a refundable credit. The credit can only be used to offset a regular tax liability, not alternative minimum tax. The credit can be carried back one year and any unused carried forward 20 years.
For a tax-exempt entity, instead of being a general business credit, the small business health insurance credit is a refundable credit and can be used to obtain a refund of payroll withholding taxes.
Tasca Russo is a senior tax manager at Habif, Arogeti & Wynne, LLP. With more than 12 years of experience in the accounting industry, she focuses on tax planning, tax compliance and consulting for clients in the industries of manufacturing, distribution and technology. She can be reached at (770) 353-3028 or [email protected].
