Interested in Cutting Costs? How to Get the Health Care Tax Credit Your Business Deserves

On the four-year anniversary of the Affordable Care Act (ACA), many small businesses continue to have questions. One area you want to be clear about, however, is the ACA small business health care tax credit. Targeted for employers with low- and moderate-income employees, the tax credit can help you manage the costs of health care coverage.

To qualify, you must:

• Have no more than 25 full-time equivalent employees who make an annual average wage of $50,000 (adjusted for inflation in 2014)
• Pay at least half of health insurance premiums for each enrolled employee
  

Although the IRS has offered a tax credit since 2010 — with a maximum credit of 35 percent for tax years 2010 through 2013 — certain changes took place for tax years 2014 and 2015:

• The maximum credit increased to 50 percent of premiums paid for small businesses
  (35 percent for tax-exempt employers)
• Your business must be enrolled in a qualified health plan through the Small Business Health Options Program (SHOP) Marketplace
• The credit is available for two consecutive taxable years

As with most tax matters, there are other details to consider. Is your staff a mix of part-time and full-time employees? Regarding the full-time equivalent (FTE) employee designation, you’ll need to determine if you meet the threshold of 24 or fewer FTE employees.

To do this, add these two numbers:

1. Number of full-time employees who work at least 40 hours a week
   
2. Number of FTE employees, which you calculate by dividing the total
   annual hours of your part-time employees by 2.080

For example: 5 full-time employees PLUS 2 FTE employees (4 part-time employees who work 1,040 annual hours each, or 4.160 total annual hours divided by 2.080) EQUALS 7 FTE employees

This number matters because the credit amount works on a sliding scale: The smaller your business, the bigger your credit. The maximum credit is available to employers with 10 or fewer FTEs and average annual wages less than $25,000.

Keep in mind, too, that even if you’re a small business that doesn’t owe taxes this year, you can carry the credit back or forward to other tax years. Plus, if the amount of your health insurance premiums is more than the tax credit, you can claim a business expense deduction for the excess. In other words, you’re entitled to a credit and a deduction for premium costs.

How to claim the credit:

You’ll need to use IRS Form 8941, Credit for Small Employer Health Insurance Premiums to calculate the credit. Then, be sure to include the amount as part of the general business credit on your income tax return.

Since the rules surrounding this tax credit are complicated, you may want to consult a tax professional for specific direction.