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8 questions for small businesses considering subsidies

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If you’re a small business, would you qualify for the tax credit available under the Patient Protection and Affordable Care Act?

You bet you would.

Here’s a small business health care tax credit Q&A from the IRS, with a little extra tossed in by the editors at, that should help:

Q. Who is eligible?

A. Assuming you contribute 50 percent or more toward employees’ self-only health insurance premiums, a qualified employer must:

  • have fewer than 25 full-time employees or a combination of full-time and part-time (for example, two half-time employees equal one employee for purposes of the credit);
  • the average annual wages of employees must be less than $50,000,
  • and the employer must pay at least half of the insurance premiums.

The employer must also pay premiums under a “qualifying arrangement.” See the “What expenses count” question on the Calculating the Credit page.

Q. How much are we talking about?

A. Up to 35 percent (25 percent is the limit for non-profits) of premium contributions. By 2014, the credit rises to 50 percent or 35 percent for nonprofits.

Q. What’s this I hear about sliding scales?

A. OK, you’ll want to break out your calculators for this. Ready? The credit is reduced if your number of FTEs exceeds 10, or if average annual wages exceed $25,000. Under the government’s formulas, the credit is reduced by 1/15 for each FTE above 10. For each $1,000 above $25,000 in average annual wages, the credit is reduced by 1/25.

Q. Can a household employer qualify, even if he or she is not directly engaged in a trade or business?

A. Yes. For tax years 2010 through 2013, a household employer can qualify.

Q. How about a small employer outside the U.S.?

A. A qualified employer outside the United States (including a U.S. territory) with income connected with a trade or business in the United States may claim the credit for tax years 2010 through 2013 if it pays for coverage issued in and regulated by one of the 50 states or the District of Columbia.

Q. How are employer contributions to a multi-employer plan treated for purposes of the credit?

A. Contributions are treated as payment of premiums for purposes of the credit, but 100 percent of the cost of coverage must be paid from employer contributions, not by employees.

Q. Can a section 521 farmers’ cooperative be eligible?

A. Yes. A section 521 farmers’ cooperative subject to tax under section 1381 is eligible as a taxable employer if it otherwise meets the definition of a qualified employer.  

Q: How do you claim the tax credit?

A: The IRS advices you:

  • Check with a tax professional.
  • Use Form 8941, Credit for Small Employer Health Insurance Premiums, to calculate the credit.
  • Check to see whether your state offers additional health care tax credits for small businesses.

See also:

Feds: Some “indemnity plans” come under PPACA

5 payroll tax tips for small businesses

Health care reform FAQ: How does the employer mandate tax penalty work?